Politics, Economics and other Stuff

Structural Changes in the Municipal Bond Market

Warren Buffet points to structural changes in the municipal bond market:

The rationale behind very low premium rates for insuring tax-exempts has been that defaults have historically been few. But that record largely reflects the experience of entities that issued uninsured bonds. Insurance of tax-exempt bonds didn’t exist before 1971, and even after that most bonds remained uninsured.

A universe of tax-exempts fully covered by insurance would be certain to have a somewhat different loss experience from a group of uninsured, but otherwise similar bonds, the only question being how different. To understand why, let’s go back to 1975 when New York City was on the edge of bankruptcy. At the time its bonds – virtually all uninsured – were heavily held by the city’s wealthier residents as well as by New York banks and other institutions. These local bondholders deeply desired to solve the city’s fiscal problems. So before long, concessions and cooperation from a host of involved constituencies produced a solution. Without one, it was apparent to all that New York’s citizens and businesses would have experienced widespread and severe financial losses from their bond holdings.

Now, imagine that all of the city’s bonds had instead been insured by Berkshire. Would similar belttightening, tax increases, labor concessions, etc. have been forthcoming? Of course not. At a minimum, Berkshire would have been asked to “share” in the required sacrifices. And, considering our deep pockets, the required contribution would most certainly have been substantial.

Local governments are going to face far tougher fiscal problems in the future than they have to date. The pension liabilities I talked about in last year’s report will be a huge contributor to these woes. Many cities and states were surely horrified when they inspected the status of their funding at yearend 2008. The gap between assets and a realistic actuarial valuation of present liabilities is simply staggering.

When faced with large revenue shortfalls, communities that have all of their bonds insured will be
more prone to develop “solutions” less favorable to bondholders than those communities that have uninsured bonds held by local banks and residents. Losses in the tax-exempt arena, when they come, are also likely to be highly correlated among issuers. If a few communities stiff their creditors and get away with it, the chance that others will follow in their footsteps will grow. What mayor or city council is going to choose pain to local citizens in the form of major tax increases over pain to a far-away bond insurer?

Ship Survivability

Galrahn writes:

The USS Port Royal (CG 73) grounding is going to be expensive, at least I expect it to be. There are a lot of things that can get damaged when a ship goes aground, and tries to pull itself off the coral reef several days in row. A lot of the damage being reported by Navy Times in this article makes sense, but some of the damage bothers me a bit.

The hatches of the forward and aft vertical launch cells, which hold Port Royal’s arsenal of missiles, were damaged as the ship’s hull rolled and flexed with the waves.

The antennae and other equipment on the ship’s mast endured “severe shock” as the ship rolled on its reef. The shocks also affected the alignment of Port Royal’s Aegis radar arrays and other sensitive gear, costing the ship the use of its Aegis sensors as well as its ballistic-missile defense capability.

The VLS damage has me wondering if we are seeing an unfortunate side effect of VLS as opposed to rail launcher system, and I would appreciate some expert opinions on this. VLS is very economical for space, and allows the Navy to increase the weapon payload of our ships. Will this make opening all the VLS hatches a standard procedure for future groundings? Would we have seen a similar problem with a rail system? Shock and buckling from a ship being flexed isn't unique to being grounding, the effect of many weapon systems hitting a ship would produce the same effect.

Update #1: and since we're doing stupid Navy accidents, my favorite sub collision photo, the aftermath of the USS San Fransisco hitting a undersea mountain in January 2005 at depth of more than 500 feet while going over 46 km/h, probably around 55 km/h or so, exhibiting impressive ship survival.  Back on duty as of late 2008. 

German Military Officers after WWII

One of the interesting issues with people like Wilhelm Wimmer is what they did after WWII, first in terms of how they were precessed by the allies and what they went on to do with their lives.  In Wimmer's case I don't know what he did, but being 56 at the end of the war he may just have entered early retirement, depending on his family's finances and he must have been retired by the 1960s, when he was in his seventies.  I don't know if or how long Wimmer was a PoW or if he stood trial.  Erhard Milch, Wimmer's boss, was tried in one of the twelve U.S. trials -- this one known as the 'Milch trial' -- that are collectively known as the "Subsequent Nuremberg Trials" in 1947, mostly as principal and accessory in enterprises involving slave labor .  Milch was sentenced to life imprisonment at Rebdorf Prison, near Munich. The sentence was commuted by John McCloy, High Commissioner of Germany, to 15 years of imprisonment in 1951. Milch was paroled in June 1954.  Milch lived until 1972, but I cannot find anything about what he did after his release from prison. 

In general, looking around, it is impressive how many high level German officers were sentenced to death or life imprisonment by the US or the UK, but who then were released by the early 1950s.  For instance, Albert Kesselring,  Luftwaffe Generalfeldmarschall and after Nov. 1941 theater commander in the Mediterranean until the end of the war, including the war in Italy, was sentenced to death by Britain in 1947 for reprisal orders against women and children in Italy, including incidents tried much later for lower ranking soldiers, but pardoned in 1952.  Kesselring became head of the rightwing Stahlhelm, Bund der Frontsoldaten in prison and continued to head the organization until his death in 1960.  There are also many others who were sentenced and then released in the early 1950s, I should find a list. 

The two most famous WWII German generals to go on the post-war national security carriers are Reinhard Gehlen (1902 - 1979) and Adolf Heusinger (1897 – 1982). At the end of WWII, Gehlen was the Generalmajor heading up Fremde Heere Ost, the military intelligence organization for the Eastern Front.  Gehlen went on to lead a intelligence organization under a CIA front from 1945?-56, which then emerged as the Bundernachrichtendiest (the West German foreign intelligence agency), with Gehlen retirning a head in 1968.   The consensus now appears to be that Gehlen did a lot to help out many highly compromised Third Reich personel, including highly compromised SS and SD personel.  And, furthermore, that Gehlen wasn't good at counterintelligence, leading to the BND being well pentrated by the East German HVA. Heusinger was the WWI head of the General Staff's Operationsabteilung and for a while acting Chief of the General Staff. In this capacity, he was the person standing to Hitler's right when Stauffenberg's bomb went off on July 20, 1944.   He went on to become the head of the Bundeswehr's Militärischer Führungsrat, head of Abteilung Gesamtstreitkräfte and then Generalinspekteur der Bundeswehr, followed by being Chair of Nato's Military Committee.

More later...the main point I'm trying to make here is that there's a lot of additional writing on this issue that's come out in the last ten years, both due to archive releases after the end of the Cold War and that generation publishing its memoirs or participating in oral histories. 

'Ryanair May Charge Passengers to Use On-Board Toilet'

So the news reports say. Just adds to my sense that I'm living in the intro section of a Schwarzenegger movie. 

Note that the key word above is 'may' --- this may just be free publicity seeking. 

The Luftwaffe's Aircraft Development 1933-36

Since I've recently been pondering Bavarian history between WWI and WWII, I decided to google my German grandparents' upstairs tenant before I was born.   My parents and I got to take over this apartment on the 2nd floor of my grandparents house after I was born and freed up the space for my grandparents, who no longer needed the rent.  He was Wilhelm Wimmer, along with his wife and housekeeper.  I don't know how well his family knew my family, but I assume living in the same house for several years means that they did have some exposure to each other.   I'd been vaguely aware that he'd had a military career, but I didn't know any details. 

Googling, what you get on Wimmer's career is

General der Flieger Wilhelm WIMMER (9 Apr 1889 - 15 May 1973)
Entered the Bavarian Army in 1909, and served as an air officer during World War I. Demobilized in 1920, but was reactivated in the Army in 1921, and transferred to the Luftwaffe in 1933. [he appears to be 'Chef der Fliegertechnik im Heereswaffenamt' in 1932]

1 Sep 1933 - 30 Sep 1935: Section Chief, Air Ministry
1 Oct 1934: Promoted to Oberst)
1 Oct 1935 - 31 May 1936: Chief of Technical Office [T-Amt], Air Ministry
(1 Apr 1936: Promoted to Generalmajor)
1 Jun 1936 - 30 Jun 1938: Senior Air Commander III
(1 Apr 1938: Promoted to Generalleutnant)
1 Jul 1939 - 31 Jan 1939: C.O. 2. Air Division
1 Feb 1939 - 10 May 1940: C-in-C, Luftwaffenkommando East Prussia
(1 Oct 1939: Promoted to General der Flieger)
11 May 1940 - 19 Aug 1940: Acting C-in-C, Luftflotte 1
20 Aug 1940 - 6 Sep 1944: G.O.C. Luftgau Belgium & N. France
6 Sep 1944 - Nov 1944: Reserve status
Nov 1944 - 8 May 1945: Attached to staff of C-in-C of Parachute Troops

Wimmer's claim to fame, as far as it goes, is the 1933-36 period, in which he was part of the Luftwaffe's aircraft development effort, laying down the aircraft that would form the backbone of the Luftwaffe's WWII effort, successful in the first few years, much less successful as aircraft development after 1936 did not lead to aircraft that could maintain Germany's competitive edge.  Some of these aircraft are quite well know, in particular the Heinkel He 111, the Junkers Ju 87 or Stuka and the Messerschmitt Bf 109.  Wimmer rose to head of aircraft development, T-Amt, in the fall of 1935 -- though there are indications he was Abteilungsleiter for aircraft development before then, since ranks and agency titles for major functions can be quite lowly in the early 1930s -- and was removed by Goering, who found Wimmer 'mulish and pedantic', in the summer of 1936, in favor of Ernst Udet.

Wimmer's career after this is less distinguished.  He did participate in the invasion of Poland as commander of the Luftwaffenkommando Ostpreussen and was promoted to commanding general of the  Luftflotte 1, the command in charge of Germany's air defense, until he was removed in the initial phases of the Battle of Britain.  The rest of the war he spent in the administrative position of Befehlshaber Luftgau-Kommando Belgien-Nordfrankreich working on logistics and raising French, Belgian and Dutch troops for the Luftwaffe to fight in the East.  He was removed from this command in September 1944 due to the disorderly retreat of the Luftwaffe and picked out by Hitler as one of three Luftwaffe generals to be executed for failure to perform their duties, but the military justice system managed to gum up the process sufficiently (as well as identify another Luftwaffe general for execution for looting) to forestall this outcome, despite a series of missives from Goering to stop stalling. (see Command and Leadership in the German Air Force by Richard Suchenwirth)

David Irving reports on a fight between the Luftwaffe's Generalfeldmarschal Erhard Milch and Udet, Wimmer's  replacement in aircraft development and procurement, in front of Goering:

Aber Milch ärgerte Sich immer mehr darüber, daß Göring ihn zu Udets Vorträgen nicht hinzuzog, obwohl die Dienstanweisung seine Anwesenheit vorschrieb. Er behielt seinen Ärger für sich, denn er wußte, wie empfindlich Udet auf Kritik reagierte. Milch explodierte erst an einem frühen Märztag im Jahre 1940, als sie mit Göring von einer Besichtigung der Einsatzgruppen im Westen zurückkehrten. Im Speisewagen seines Sonderzuges begann Göring unvorsichtigerweise, den Generalluftzeugmeister wegen aller Dinge, die sie gesehen hatten, zu loben. Milch verlor die Selbstbeherrschung und wies darauf hin, daß Udet hier kein Verdienst zukomme: »Das ist nicht dein Tisch – das ist der Tisch von Wimmer, das hat der gemacht!« Und zu Göring gewandt: »Es ist doch ausgeschlossen, daß sich einer hier von uns mit fremden Federn schmückt!« Die He 111 war zuerst von der Lufthansa besteht worden, und die anderen Flugzeuge und Motoren waren lange vor Udets Ernennung in Auftrag gegeben worden.

BTW, Milch -- previously Staatssekretär im RLM and the boss of both Wimmer and Udet and also the founding director of Lufthansa in the 1920s -- turns out to have had a Jewish father and a mother of Jewish decent.  This became an issue in 1935 and lead to Goerings' famous but possibly apocryphal "Wer Jude ist, bestimme ich."

Ernst Udet was Germany's WWI flying ace most famous after Richthofen.  His accession to T-Amt after Wimmer's removal didn't go well for him:

Udet became a major proponent of the dive bomber, taking credit for having introduced it to the Luftwaffe, which was already interested in such designs. By 1936 he had, due to his political connections, been placed in command of the T-Amt, the Reich Air Ministry's development wing. However, he had no real interest in this job, especially the bureaucracy of it, and the pressure led to his addiction to alcohol (brandy and cognac).

When World War II began, his internal conflicts grew more intense. Aircraft production requirements were much more than the German industry could supply, given limited access to raw materials such as aluminium. Göring responded to this problem by simply lying about it, which further upset Udet. After the Luftwaffe's defeat in the Battle of Britain, Göring tried to deflect Hitler's ire by blaming it on Udet. Hitler's attack on the Soviet Union drove Udet further into despair. On November 17, 1941, Udet committed suicide, shooting himself in the head while on the phone to his girlfriend.

In any case, that's what I know now.  I assume I've been in the same room with Wimmer, but that's just a guess. [Update: my mother tells me I never encountered Wimmer.]

Wiki writes about the He-111:

The Heinkel He 111 was a German aircraft designed by Siegfried and Walter Günter in the early 1930s in violation of the Treaty of Versailles. Often described as a "Wolf in sheep's clothing", it masqueraded as a transport aircraft, but its purpose was to provide the Luftwaffe with a fast medium bomber. It is perhaps the most famous symbol of the German bomber force (Kampfwaffe) due its distinctive "Greenhouse" nose. The Heinkel became the most numerous and primary Luftwaffe bomber during the early stages of the Second World War. It fared well in all the early campaigns suffering modest losses until the Battle of Britain, when its weak defensive armament left it exposed. Nevertheless, as a combat aircraft it proved capable of sustaining heavy damage and remaining airborne. As the war progressed the He 111 took on the mantle of "workhorse", and was used in a variety of roles on every front in the European Theatre throughout the war. It was used in every conceivable role; as a strategic bomber during the Battle of Britain, a torpedo bomber during the Battle of the Atlantic, a medium bomber and a transport aircraft on the Western Front, Eastern Front and Mediterranean and North African Fronts. Despite being constantly upgraded it became obsolete during the latter part of the war. But the failure of the Luftwaffe to design and produce a worthy successor meant the He 111 continued to be produced until 1944, when piston-engined bomber production was largely halted, in favour of fighter aircraft.

The first He 111 flew on 24 February 1935.  About 7,300 produced. 

Wiki writes about the Ju 87:

 The Junkers Ju 87 or Stuka (from Sturzkampfflugzeug, "dive bomber") was a two-seat (pilot and rear gunner) German ground-attack aircraft of World War II. Designed by Hermann Pohlmann, the Stuka first flew in 1935 and made its combat début in 1936 as part of the Luftwaffe's Condor Legion during the Spanish Civil War.

The aircraft was easily recognizable by its inverted gull wings, fixed spatted undercarriage and its infamous Jericho-Trompete ("Jericho Trumpet") wailing siren, becoming the propaganda symbol of German air power and the Blitzkrieg victories of 1939-1942. The Stuka's design included several innovative features, including automatic pull-up dive brakes under both wings to ensure that the plane recovered from its attack dive even if the pilot blacked out from the high acceleration. Although sturdy, accurate, and very effective, the Ju 87 was vulnerable to modern fighter aircraft, like many other dive-bombers of the war. Its flaws became apparent during the Battle of Britain—poor manoeuvrability, lack of speed and defensive armament meant that the Stuka required a heavy fighter escort to operate effectively.

The Stuka operated with further success after the Battle of Britain, and its potency as a precision ground attack aircraft became valuable to the German war effort in the Balkans Campaign, the African and Mediterranean Theatres and the early stages of the Eastern Front campaigns where Allied fighter resistance was disorganised and in short supply. However, once the Luftwaffe had lost air superiority on all fronts the Ju 87 once again became easy targets for enemy fighter aircraft. In spite of this, and lacking a successor, the type continued to be produced until 1944. By the end of the conflict the Stuka was largely replaced by ground attack versions of the Focke-Wulf Fw 190, but some units, like Sturzkampfgeschwader 2 "Immelmann" operated the Ju 87 to the last day of the war. An estimated 6,500 Ju 87s of all versions were built between 1936 and August 1944.

And finally, the Messerschmitt Bf 109:

The Messerschmitt Bf 109 was a German World War II fighter aircraft designed by Willy Messerschmitt in the early 1930s. It was one of the first true modern fighters of the era, including such features as an all-metal monocoque construction, a closed canopy, and retractable landing gear. The Bf 109 was produced in greater quantities than any other fighter aircraft in history, with a total of 33,984 units produced up to April 1945.  Fighter production totalled 47% of all German aircraft production, and the Bf 109 accounted for 57% of all German fighter types produced.  A total of 2,193 Bf 109 A-E were built prewar, from 1936 to August 1939. Approximately 1,000 Bf 109 derivatives were manufactured postwar under licence as Czechoslovakian-built Avia S-99 & S-199s and Spanish-built Hispano Aviación HA-1109 and HA-1112 Buchons.

The Bf 109 was the backbone of the Luftwaffe fighter force in World War II, although it began to be partially replaced by the Focke-Wulf Fw 190 from 1941. The Bf 109 was the most successful fighter of World War II, shooting down more aircraft than any of its contemporaries. Originally conceived as an interceptor, it was later developed to fulfill multiple tasks, serving as bomber escort, fighter bomber, day-, night- all-weather fighter, bomber destroyer, ground-attack aircraft, and as reconnaissance aircraft. Although the Bf 109 had weaknesses, including short range and challenging take off and landing characteristics, it stayed competitive with Allied fighter aircraft until the end of the war.

The plane's procurement history is described as:

During 1933 the Technisches Amt (T-Amt), the technical department of the RLM, concluded a series of research projects into the future of air combat. The result of the studies was four broad outlines for future aircraft:

• Rüstungsflugzeug I for a multi-place medium bomber
• Rüstungsflugzeug II for a tactical bomber
• Rüstungsflugzeug III for a two-seat heavy fighter
• Rüstungsflugzeug IV for a single-seat fighter

Rüstungsflugzeug IV was intended to be an interceptor, replacing the Arado Ar 64 and Heinkel He 60 biplanes then in service. While it was intended the R-IV aircraft would best all others then flying, the requirements were nevertheless not terribly hard to meet.

Something called 'volcano monitoring'

From the Republican speech in response to Obama this evening, by Louisiana Governor Bobby Jindal:

But Democratic leaders in Congress rejected this approach. Instead of trusting us to make wise decisions with our own money, they passed the largest government spending bill in history - with a price tag of more than $1 trillion with interest. While some of the projects in the bill make sense, their legislation is larded with wasteful spending. It includes $300 million to buy new cars for the government, $8 billion for high-speed rail projects, such as a 'magnetic levitation' line from Las Vegas to Disneyland, and $140 million for something called 'volcano monitoring.' Instead of monitoring volcanoes, what Congress should be monitoring is the eruption of spending in Washington, DC.

I never get this, the notion that some new technology has to be useless since it is new -- what will the Republicans start complaining about next, crazy practices like fire alarms in public buildings or weather satellites for monitoring hurricanes that might hit Louisiana?  Then again, Washington, California and Hawaii are Democratic states and there are no active volcanoes in Louisiana.   And who needs Alaska? 

Here is the USGS webpage on volcano monitoring, and the USGS Cascades volcanos webpage.  You just might want to know if a volcano is going to blow up in your neighborhood.

This from guys who support tens of billions of dollars (or more) for midcourse antiballistic missile defense. 

Update #1: also, from looking around, it appears that there is $140 millon in the stimulus bill for all of USGS, including but not limited to volcano monitoring facilities. 

And Brad Plumer points to the Yellowstone supervolcano:

The Yellowstone Caldera is the volcanic caldera in Yellowstone National Park in the United States. It is located in the northwest corner of Wyoming extending into portions of Montana and Idaho. The major features of the caldera measure about 55 kilometers (34 mi) by 72 kilometers (45 mi). ...

The loosely-defined term 'supervolcano' has been used to describe volcanic fields that produce exceptionally-large volcanic eruptions. Thus defined, the Yellowstone Supervolcano is the volcanic field which produced the latest three supereruptions from the Yellowstone hotspot. The three super eruptions occurred 2.1 million, 1.3 million and 640,000 years ago; forming the Island Park Caldera, the Henry's Fork Caldera, and Yellowstone calderas, respectively^[5]. The Island Park Caldera supereruption that produced the Huckleberry Ridge Tuff was the largest and produced 2,500 times as much ash as the 1980 Mount St. Helens eruption. The second largest supereruption formed the Yellowstone Caldera and produced the Lava Creek Tuff. The Henry's Fork Caldera produced the smaller Mesa Falls Tuff but is the only caldera from the SRPY hotspot that is plainly visible today.^[6]

Non-explosive eruptions of lava and less violent explosive eruptions have occurred in and near the Yellowstone caldera since the last supereruption. The most recent lava flow occurred about 70,000 years ago while the largest violent eruption excavated the West Thumb of Lake Yellowstone around 150,000 years ago. Smaller steam explosions occur as well; an explosion 13,800 years ago left a 5 kilometer diameter crater at Mary Bay on the edge of Yellowstone Lake (located in the center of the caldera).^[7][8] Currently, volcanic activity is exhibited only via numerous geothermal vents scattered throughout the region, including the famous Old Faithful Geyser.

he upward movement of the Yellowstone caldera floor – almost 3 inches (7 centimeters) per year for the past three years – is more than three times greater than ever observed since such measurements began in 1923.^[17] From mid-Summer 2004 through mid-Summer 2008, the land surface within the caldera has moved upwards, as much as 8 inches at the White Lake GPS station.^[18] The U.S. Geological Survey, University of Utah and National Park Service scientists with the Yellowstone Volcano Observatory maintain that they "see no evidence that another such cataclysmic eruption will occur at Yellowstone in the foreseeable future. Recurrence intervals of these events are neither regular nor predictable.".^[8]

Update #2: See also Nate Silver.

Update #3: comments here suggest that the real Republican anger here may be directed at the stimulus bill authorizing USGS to use money for stream gauges, providing a legally required factual foundation for water conservation activities. 

Kevin Drum endorses misleading economic sophistry

It's often disappointing to see bloggers or journalist one likes write in one's own area of expertise.  For instance, Kevin Drum today:

I've got a piece on cap-and-trade in the latest issue of Mother Jones.  You should go read it.  It's designed to explain cap-and-trade for people who kinda sorta know what it is but are still a little vague on the details.  The basic structure is "Ten Things You Should Know About Cap-and-Trade," and here's #10:

10. It's not a panacea. "Cap and trade is just a tool," says the NRDC's [Dale] Bryk. It might be the backbone of any effective long-term carbon reduction policy, but it's not the only tool we need. Or even necessarily the best. If you want to improve vehicle mileage, for example, raising federal fuel-efficiency standards is "much cheaper for consumers than raising the price of gas," she says.

Oh my god, this is so misleading (but not necessarily technically false).   And I'm not cutting out any relevant context. 

First, policy should not be driven by trying to 'improve (average) vehicle mileage'. This is not a sensible objective.  What we should care about is total carbon emissions, not the average carbon emission per existing vehicle driven a certain number of miles. Secondly, and more importantly, the objective shouldn't be to do this at a low cost for people as consumers. The objective is to do it at a low cost to society (or people in all their identities as consumers, producers, capital owners, taxpayers and public good users). Cap-and-trade policies with permit auctions, or even better gas taxes, raise revenue for the state to undertake useful activities -- take your pick which ones -- and neglecting the benefits of tax revenues when comparing a tax policy with tax revenues to a policy without tax revenues is highly misleading.  Drum should not be endorsing policy arguments that work because they treat public spending as useless. 

Finally, I could see Bryk playing the political game here of selling the politically more viable vehicle fuel standard policy as 'better' by some measures than the gas tax policy using sophistry.  But Drum ought not to fall for the sophistry.  Or Bryk is simply being quoted out of context by Drum.   

Update #1: now one could try to argue that there are good reasons to want to have fuel-efficiency standards in addition to a gas taxes, for reasons that don't have to do with wanting to raise 'improving average vehicle mileage'  as a goal in itself.  For instance, if there is some sort of political equilibrium where vehicle mileage determines gas taxes, then mandating higher mileage for new cars might make sense since it makes raising gas taxes easier in the future.  Not clear to me on the spot what the right model for this sort of claim would be.  But that isn't what Bryk or Drum are arguing here (though it may be what Bryk has in mind). 

Update #2: indeed, what is the standard reference for a model along the lines I mention above?  There ought to be one in the literature, say the endogenous tariffs literature, though I'm not sure those models are the right ones here. 

Update #3: and if you think I'm being a bit touchy here, here is Drum a few days ago:

The environmental policy community almost unanimously supports carbon pricing, including measures like increasing the gasoline tax, but I don't think you'd find a serious analyst in the country who thinks that a price increase at the pump is more effective at reducing gasoline use and GHG emissions than an increase in mileage standards.

Meatballs

Kid #1 and I cooked dinner this evening, an experiment in  joint cooking.  We settled on meatballs, sauce and pasta.  The adults liked the meatballs, the kids not so much.  They did taste like meatballs are supposed to taste. A bit too much vegetable oil. 

Evil Republicans

Steve Benen writes about evil Republican behavior:

Take Sen. Richard Shelby (R) of Alabama, for example. (via Ben Smith):

Another local resident [in Cullman County, Alabama] asked Shelby [yesterday] if there was any truth to a rumor that appeared during the presidential campaign concerning Obama's U.S. citizenship, or lack thereof.

"Well his father was Kenyan and they said he was born in Hawaii, but I haven't seen any birth certificate," Shelby said. "You have to be born in America to be president."

Shelby isn't just some random yahoo with a right-wing radio talk-show; he's a four-term United States senator. He's the ranking member on the Senate Banking Committee, for crying out loud. It's incumbent on him to be somewhat coherent and conduct himself with at least a little sanity.

Playing to the crazy base from the very heights of the Republican establishment.

The other pets

Kurt Eisner

I've been looking around the web for Austrian and Bavarian history in the run up to and in the aftermath of WWI, and there is a lot I am frightfully clueless about.  So I should find a good write-up of 1918-22  Bavarian history.  For instance, I had no idea that Kurt Eisner, the first prime minister of the state of Bavaria after the removal of King Ludwig III from power,  was a charismatic Jewish journalist from Berlin, but probably not the top of the line candidate you'd want for winning elections statewide.  Indeed, Eisner was defeated in the January 1919 elections, then assassinated, followed by the communist seizure of power in Munich.   I'd always assumed Eisner was some sort of Catholic Bavarian handwerker, since anybody more radical in background isn't going to be viable as a candidate in Bavaria.  Oh, those ingrained assumptions. 

In any case, it seems the January 1919 elections were boycotted by the KPD, and the election results were:

Die Wahlbeteilung lag bei ca. 86 %. Ausschlaggebend dafür war die Politisierung und Mobilisierung der Wähler, die alle politischen Parteien intensiv betrieben, auch und vor allem die neu gegründete Bayerische Volkspartei (BVP). Sie erzielte 35 % der Stimmen und erhielt damit 66 der insgesamt 180 Mandate. Dicht dahinter folgte die MSPD mit 33 % und 61 Mandaten, danach die liberale DDP mit 14 % und 25 Mandaten. Der Bayerische Bauernbund (BB) erzielte 9,1 %, die Nationalliberalen (NLP und BMP) 5,8 %. Die Unabhängigen Sozialdemokraten (USPD), die Partei des Ministerpräsidenten Kurt Eisner (1867-1919), erlitten mit 2,5 % eine deutliche Niederlage. Sie waren mit drei Sitzen noch im Landtag vertreten, die übrigen kleinen Parteien mit insgesamt 0,6 % der Stimmen nicht.

Which seems to put the popular support for the Bayerische Räterepublik in perspective.  But it would be nice to know more, especially since these events were formative for many. For instance, it seems the Bayerische Bauernbund starts off as a left anti-clerical party, part of the initial USPD, MSPD coalition, moving rightward only later:

Wenn auch die Bauernbundbewegung zunächst als eine agrarisch-mittelständische Organisation mit primär wirtschaftspolitischen Zielen ins Leben getreten war, so verstand sie sich doch - im Gegensatz zum Reichs-Landbund oder den Christlichen Bauernvereinen - von Anfang an als politische Partei mit dem Ziel, in die Parlamente zu gelangen. Der Bauernbund trat dabei als entschiedener Gegner und erklärter Herausforderer der etablierten Zentrumspartei, der traditionellen politischen Heimat der bayerischen Landbevölkerung, auf. Wie auch das Zentrum - ab 1918 die Bayerische Volkspartei (BVP) - und die Christlichen Bauernvereine zwar fest im ländlich-agrarischen katholischen Milieu verwurzelt, war der Bauernbund dennoch dezidiert antiklerikal, dem Adel sowie den kirchlichen und staatlichen Obrigkeiten und der Bürokratie gegenüber sehr kritisch eingestellt. Es wurde ihm daher auch das Etikett "Sozialdemokratie des flachen Landes" (Bergmann, Bauernbund, 19) verliehen. Die verschiedenen Bauernbundprogramme ab 1897 betonten neben wirtschafts- und agrarpolitischen Forderungen mit Nachdruck die Eigenständigkeit Bayerns, demokratische Grundprinzipien auch die Trennung von Staat und Kirche, die Verstaatlichung des Schulwesens und die Abschaffung der geistlichen Schulaufsicht. Vor dem Hintergrund dieser programmatischen Grundlinien war der Bauernbund allerdings Zeit seines Bestehens geprägt von innerparteilichen Auseinandersetzungen zwischen einem gemäßigten und einem linken, radikaleren Flügel.

Vor allem die Rolle dieser linken Fraktion des Bauernbundes in der Revolution von 1918 stellte sich in der Weimarer Zeit - neben den säkularen schul- und kulturpolitischen Positionen des Bauernbundes - als Belastung im Verhältnis zu BVP und Christlichem Bauernverein heraus. Der radikale Flügel des Bauernbundes unter den beiden Brüdern Karl Gandorfer (1875-1932) und Ludwig Gandorfer (1880-1918) aus dem niederbayerischen Pfaffenberg stand in Verbindung mit Ministerpräsident Kurt Eisner (1867-1919). Die Gandorfers sicherten ihm zu, die Nahrungsmittelversorgung Bayerns auch während des revolutionären Umbruchs aufrechtzuerhalten. Ludwig Gandorfer erhielt am 9. November 1918 von Eisner den Auftrag, einen parlamentarischen Bauernrat (Zentralbauernrat) zu bilden. Nach seinem tödlichen Autounfall am 10. November wurde sein Bruder Karl als Vorsitzender des Bauernrates Mitglied der Provisorischen Regierung Eisner und besetzte den Zentralbauernrat fast zur Gänze mit linken Bauernbündlern.

Ehe zur linken Hand

I'd not even been aware of this term: Ehe zur linken Hand or Morganatische Ehe in German, or morganatic marriage in English. 

The Prussian Allgemeine Landrecht (1794) puts it this way, introducing the applicable law:

Neunter Abschnitt
Von der Ehe zur linken Hand
Begriff.
§. 835. Ehen zur linken Hand unterscheiden sich von andern Ehen bloß darinn, daß die Frau
durch selbige nicht alle Standes- und Familienrechte erlangt, welche die Gesetze einer
wirklichen Ehefrau beylegen.
Fälle, in welchen solche Ehen zuläßig sind.
§. 836. Dergleichen Ehen sind in der Regel nicht zuläßig; vielmehr erfordern sie allemal,
wenn sie statt finden sollen, die unmittelbare Landesherrliche Erlaubniß.
§. 837. Diese Erlaubniß kann nur von Mannspersonen höhern Standes, in außerordentlichen
Fällen, und aus erheblichen Gründen nachgesucht werden.
§. 838. Zu den erheblichen Gründen gehört besonders, wenn der Mann nicht Vermögen oder
Einkünfte genug besitzt, um eine Frau und Familie standesmäßig zu ernähren und zu
versorgen.
§. 839. Ferner, wenn er durch eine zweyte standesmäßige Heirath das den Kindern erster Ehe
bestimmte Familien-Vermögen zu sehr zu belasten oder zu schmälern besorgt.
§. 840. Die Richtigkeit dieser Gründe muß sofort bescheinigt, oder gehörig untersucht werden.
§. 841. Die Beurtheilung ihrer Erheblichkeit aber bleibt dem höchsten Landesherrn allein
vorbehalten.

I ran into this term looking up some on the background to the assassination of Crown Prince Franz Ferdinand.  Turns out he had a morganatic marriage to a woman of lower rank (though it seems not for reasons that the ALR would have allowed, but maybe I'm misreading the ALR -- in any case due to the way the Habsburger Hausrecht worked, though elevating his wife's family's status seems to have been an option as well).  And, on the topic I was after, there seems -- at least on my first glance at the literature -- to be a consensus now that the assassination of Franz Ferdinand was run by the intelligence service of the Serbian General Staff using Bosnian students as a front, with the action, after it was under way, briefed to the Serbian prime minister.  Obviously there is lots of context for this these events (including, well, that this was one of several cross-border assassination plots against high level Austrian officials going back several years), but these facts themselves don't seem contested.   Somehow I had managed to competely miss this (i.e. the high level and sustained involvement of the Serbian state). 

Why did the chicken cross the road?

The social science version:

“We must first study the chickens in aggregate; once we understand the chicken industry, then we can explain the individual chicken’s conduct.” — Joe Bain

“We must study the potential mobility barriers of a meaningful strategic group of chickens to understand the individual chicken’s conduct.” — Richard Caves

“The reason for the chicken’s behavior is causally ambiguous.” — Richard Rumelt

“The behavior of the chicken is socially embedded.” — Mark Granovetter

“The chicken is merely following its standard operating procedures.” — Richard Cyert and James March

“Walking across the street is a core competence of the chicken.” — Gary Hamel

“Walking across the street is the chicken’s strategic intent.” — C. K. Prahalad

“It is the chicken’s dominant logic.” — Richard Bettis

“It is simply a routine of the chicken.” — Sidney Winter

“In a complex environment such behavior is the chicken’s dynamic capability.” — David Teece

“”We will need to triangulate to understand the ESSENCE OF DECISION of the chicken.” — Graham Allison

“The chicken is attempting to economize on bounded rationality and attenuate opportunism.” — Oliver Williamson

“The chicken is choosing purposefully based on its perception of its subjective opportunity set.” — Edith Tilton Penrose

“The chicken will likely be hit by a car.” – Population ecology theorists

“The chicken is driven to seek power and resources from the other side of the road.” — Jeffry Pfeffer

“The chicken’s walking is part of its activity system.” – Michael Porter

“The chicken’s walking is a discovery procedure; a kind of chicken’s spontaneous order.” — Friedrich Hayek

“The fact that the chicken continues to walk across the road, indicates that the chickens walking has been transformed from a core capability to a core rigidity.” — Dorothy Leonard Barton

“To position itself.” — Porter

“Because the path is more interesting than the equilibrium position.” — Penrose

“Learning by doing.” — Arrow

“Because of procedural (ir)rationality.” — Simon

“To effect intra-chicken conflict resolution.” — Cyert and March

“To experience unit cost economies.” — Chandler

“To claim the residual corn.” – Alchian and Demsetz

“Spontaneous dis-order.” – Mises

“For creative distraction.” — Schumpeter, before he learned English

“To avoid chicken capture.” — Stigler

“Because of market failure.” — Coase

“It has nothing to lose except the oven.” — Marx

“Because of its animal spirit.” — Keynes

“To collect dispersed knowledge.” — Hayek

“Just to be on the safe side.” — Knight

“A road unexamined is not worth crossing.” — Socrates

“To return to God.” — St. Augustine

“It is due to the chicken’s monads.” — Leibniz

“To advance the evolution of the world.” – John Dewey

“The chicken is absurd.” — Sartre

“It does not make a difference.” – Albert Camus

“All I know is that I don’t know.” — Plato

General Order No. 13

I'd not been aware of General Order No. 13 (1862), issued by Major-General Ulysses S. Grant  on December 17, 1862:

The Jews, as a class violating every regulation of trade established by the Treasury Department and also department orders, are hereby expelled from the department [the "Department of the Tennessee," an administrative district of the Union Army of occupation composed of Kentucky, Tennessee and Mississippi] within twenty-four hours from the receipt of this order.

Post commanders will see to it that all of this class of people be furnished passes and required to leave, and any one returning after such notification will be arrested and held in confinement until an opportunity occurs of sending them out as prisoners, unless furnished with permit from headquarters. No passes will be given these people to visit headquarters for the purpose of making personal application of trade permits.

Revoked by Grant on January 17, 1863 after complaints, including a delegation including Jews expelled from Tennessee, made it all the way to President Lincoln. 

Getting out of Iraq

Tom Ricks:

It seems to me that by vowing to get out of Iraq in 16 months, President Obama is not departing from the mistakes of George Bush, but repeating them. That is, Bush was persistently overoptimistic about Iraq. His original war plan assumed that the United States would get down to 30,000 troops in Iraq by the fall of 2003. Instead, here we are more than five years later with more than four times that number of troops mired in Iraq. I hope we can stop planning for Iraq only on best-case assumptions. I mean, it hasn't worked, I think.

I'm pretty sure there is a longer than 16 month plan for getting out of Iraq --- I sure hope there is.  On the other hand a serious attempt to get out in 16 months is probably very useful as well. 

"Don’t ever take the joy of death away from the public. Because if you don’t see losers in pain, you begin to think the game is rigged."

Sudhir Venkatesh, professor of sociology -- mostly focusing on crime & law -- at Columbia, advises Treasury Secretary Geithner. 

Harold Koh to State

Crowley reports:

Today the Post's Al Kamen repeats the existing talk that Yale Law professor Harold Koh will be Hillary Clinton's top lawyer at the State Department. Koh is a strong liberal on issues of international law and human rights (he is an adamant torture opponent, for instance), which adds another dot to a picture of an Obama administration whose legal picks are among its most liberal. Contrast Eric Holder's clear condemnation of waterboarding versus National Intelligence Director Dennis Blair's more careful take, for instance.

Or, contrast Koh's view that the Iraq war was a violation of international law with Hillary Clinton's 2002 support for the war resolution.

Why doesn't the Fed adopt an inflation or minimum price level target?

Given current deflationary expectations, both in the short run and in the longer run, or at least a considerable fear that, even if deflation isn't yet the median expected outcome, deflation cannot anymore be viewed as unlikely, together with the fact that high real debt burdens are a drag on the economy, why doesn't the Fed adopt an inflation or minimum price level target?  In particular, why hasn't the Fed announced a policy that would invalidate the expectations of a much lower expected price level in the future than was expected just a few months ago (see this post)?  At times it does feel like 1930-32 all over again, when central banks also did not act as aggressively as they could have, at least given the modern interpretation of central bank policy options. 

More later...

http://www.businessinsider.com/volcker-a-little-inflation-is-a-terrible-idea-2009-2

http://seekingalpha.com/article/121833-inflation-demand-destruction-and-wealth-erosion-trump-money-growth?source=feed

http://www.econbrowser.com/archives/2009/02/deflation_risk_1.html

http://www.motherjones.com/kevin-drum/2009/02/inflating-your-troubles-away

http://www.businessinsider.com/of-course-were-going-to-inflate-our-way-out-of-this-debt-2009-2

Living in a Movie Script

Sometimes, but only sometimes, I feel I'm living in a bad movie script, something Schwarzenegger would have stared in back in the early 1990s. For instance, when I came across this website today:

The Interagency Counterinsurgency Initiative (ICI) seeks to inform and help shape relevant USG policy and programs by incorporating the theory and history of counters to organized movements that use subversion or violence rather than established political processes to undermine or overthrow governments, with the goal of focusing appropriate elements of diplomacy, defense, and development on the alleviation of such threats.

So we're now replacing the global war on terror (GWOT) with counterinsurgency (COIN).   Is this 1964 or 1972?  Looks more like 1964 to me...

Uwe Reinhardt lays down the way the world works

A somewhat funny presentation.   First half is about banking, second about health care economics.  Presented at J.P. Morgan’s annual healthcare conference on January 13 2009.  Investment bankers looking for the next big thing after structured finance.  via Buiter. 

US Monetary Policy and Price Level Expectations

I've been increasingly annoyed by the Fed's unwillingness to announce policy targeting expectations of the future CPI (or other price level measure) path.  One can back out market expectations for the path of the CPI from the government bond market including inflation indexed bonds, as done fore instance by Hu McCulloch, though I ought to go remind myself what sort of assumptions go into his calculation (in particular, does anything get messed up by a flight-to-quality, repo market issues, whatever 'liquidity' means and how inflation indexed bonds work when the CPI falls [I believe TIPS pay out at least face value even if there is deflation]? Also, there is a pricing model behind this and 'expected' is an average conditional on that model...)

So what does the implied path of the CPI look like if one looks at McCuloch's data?  His last update is for Dec. 31, 2008.  Lets compare it to the pre-crisis Aug. 31, 2008 expectation for CPI.  Here is what you get, a shocking figure.  In particular, in just five months the expected CPI level for 2025 has fallen by 33%!  This is not just about commodity prices moving around and some business cycle frequency adjustment dynamics, this is the central bank falling down on the job of providing a stable numeraire for long-term contracting. 

We also have expected deflation for the next two years, as can be seen from looking at the first seven years of the graph above.  Note that almost all the action is in expectations, with actual CPI in December not falling that much (~0.6%) from the level expected in August. [Which actually seems like I ought to check McCulloch's data...this seems like too small a fall.  Maybe the timing is lagged to be consistent with the three month lag in TIPS contracts?  Yep, that seems to be it.  So these curves have three months of realized CPI at the very beginning.  Everything further out is expected.]

Finally, what do you expect bond, mortgage and loan defaults to look like if expected CPI levels do this??? Payments in 2025 are now expected to be worth 50% more in real terms that last summer (as valued in 2005). When I bought my house in 2004 I expected real house price to fall, maybe quite a bit, but I didn't expect CPI levels 20 years out to fall 33%.

European Human Rights Standards or Keep Hope Alive

EJIL reports:

Today the Grand Chamber of the European Court of Human Rights delivered its judgment in A and others v. United Kingdom, App. No. 3455/05.  ....
The applicants’ first argument was that they were victims of inhuman or degrading treatment within the meaning of Article 3 ECHR as a consequence of their indefinite detention. The Court found no violation of Article 3, since the detention was not, in fact, indefinite, as the applicants had available a variety of remedies to challenge it. According to the Court, for preventative detention to constitute inhuman or degrading treatment within the meaning of Article 3, it would be necessary for the applicants to be ‘without any prospect or hope of release’, comparable to an irreducible life sentence (para. 131).

The UK still lost, but on other grounds, basically that the UK was trying to overturn a House of Lords ruling in the ECHR and the ECHR deferred to the House of Lords.  The ECHR writes:

Moreover, the domestic courts are part of the “national authorities” to which the Court affords a wide margin of appreciation under Article 15. In the unusual circumstances of the present case, where the highest domestic court has examined the issues relating to the State’s derogation and concluded that there was a public emergency threatening the life of the nation but that the measures taken in response were not strictly required by the exigencies of the situation, the Court considers that it would be justified in reaching a contrary conclusion only if satisfied that the national court had misinterpreted or misapplied Article 15 or the Court’s jurisprudence under that Article or reached a conclusion which was manifestly unreasonable. ...

it was for each Government, as the guardian of their own people’s safety, to make their own assessment on the basis of the facts known to them. Weight must, therefore, attach to the judgment of the United Kingdom’s executive and Parliament on this question. In addition, significant weight must be accorded to the views of the national courts, who were better placed to assess the evidence relating to the existence of an emergency. (para. 180).

Oh well

This is impressive, via. Sullivan:

"Homosexuality will always be a sexual perversion. And you say that around here now and everybody goes nuts. But I don't care. They're mean. They want to talk about being nice. They're the meanest buggers I have ever seen. It's just like the Muslims. Muslims are good people and their religion is anti-war. But it’s been taken over by the radical side. What is the morals of a gay person? You can't answer that because anything goes. They're probably the greatest threat to America going down I know of." - Utah state Sen. Chris Buttars (R), speaking in the documentary, 8 - The Mormon Proposition.

Butters also appears to reference gays having 'pig sex', but the text and audio link to that has been taken down as inappropriate by news organizations.

Chris Buttars also appears to have civil rights issues with blacks:

Buttars, (Republican,West Jordon) was discussing his plan to introduce a bill which would give the Senate the power to fire judges whose rulings they found unfavorable, (a fantastically flawed idea in its own right). Reporter Tom Grover, who conducted the interview, cited that “courts are the way for those in the minority…to ensure (their) rights are protected,” which provoked what can only be described as a willfully confused response from Buttars.

“I don’t understand that at all. You give me an example. I don’t know of any example where the minority is being jeopardized by legislative action.”

When Grover responded with the 1955 Brown v. Board of Education ruling, Buttars has this to say, “Well, I think the Brown v. Board of Education is wrong to begin with. That’s a whole other subject. Call me again and take a half-hour to talk about that." ...

Amid the fray, Buttars emerged to clarify his remarks telling Deborah Bulkeley of the Deseret Morning News, “I think Brown v. Board of Education was a monumental step forward. It took that kind of bullet to break through that segregation wall.” Perhaps if Buttars should have stopped there before attempting to paraphrase Jay Greene’s book, “Education Myths,” saying, “He talks about how you had schools in the South that were really geared toward the special needs of minority kids, then all of the sudden you bused half those kids to a different school that maybe got more money, but they weren’t geared to the needs of those kids” and telling radio station KCPW, “I don’t think there’s a racial bone in my body.”

One good thing is that Buttars' reelection in 2008 was a 49.6% to 45.1% affair, much closer than his previous elections.  However, 5.1% of the vote went to a Constitution Party candidate (is this the normal amount or does it express distaste for Butters?).

Manufacturing Capacity Utilization

via CR:

And Capacity Utilization and Industrial Production continued off the cliff, including another record low in the factory sector for capacity utilization:

Capacity utilization in the factory sector alone fell to 68% in January, a record low for the index that goes back to 1948.

Here's the graph for manufacturing capacity utilization (SIC def., data) -- not that much more cliff diving than usual, but that doesn't consider a) the changing composition of manufacturing, b) the weak manufacturing capacity growth and low capacity utilization of the last few years.  And we're not done yet -- this could get worse, and that would be out of the usual range.  Also note that rebounds have historically been sharp. 

Finally, it is not clear to me how meaningfully capacity utilization can be compared in levels across decades, given how capacity utilization is constructed in this data. 

Pig

Fed Conference

via Alea:

Central Bank Tools and Liquidity Shortages
Stephen G. Cecchetti, Bank for International Settlements
Bengt Holmstrom, Massachusetts Institute of Technology

Leverage, Moral Hazard, and Liquidity
Viral Acharya, New York University’s Stern School of Business, and London Business School
S. (“Vish”) Viswanathan, Duke University

Interbank Market Liquidity and Central Bank Intervention
Franklin Allen, University of Pennsylvania
Elena Carletti, European University Institute
Douglas Gale, New York University

Bank Liquidity, Interbank Markets, and Monetary Policy
Xavier Freixas, Universitat Pompeu Fabra
Antoine Martin, Federal Reserve Bank of New York
David Skeie, Federal Reserve Bank of New York

Illiquidity and Interest Rate Policy
Douglas W. Diamond
Raghuram G. Rajan, University of Chicago and NBER

Liquidity Hoarding and Interbank Market Spreads: The Role of Counterparty Risk
Florian Heider, European Central Bank
Marie Hoerova, European Central Bank
Cornelia Holthausen, European Central Bank

Rollover Risk and Market Freezes
Viral Acharya, New York University’s Stern School of Business, and London Business School
Douglas Gale, New York University
Tanju Yorulmazer, Federal Reserve Bank of New York

Central Bank Haircut Policy
James Chapman, Bank of Canada
Jonathan Chiu, Bank of Canada
Miguel Molico, Bank of Canada

Liquidity, Default, and Crashes
John Geanakoplos, Yale University, Partner in the hedge fund Ellington Capital Management

Solving the Present Crisis and Managing the Leverage Cycle
John Geanakoplos, Yale University, Partner in the hedge fund Ellington Capital Management

Do Central Bank Liquidity Facilities Affect Interbank Lending Rates?
Jens H. E. Christensen, Federal Reserve Bank of San Francisco
Jose A. Lopez, Federal Reserve Bank of San Francisco
Glenn D. Rudebusch, Federal Reserve Bank of San Francisco

Repo Market Effects of the Term Securities Lending Facility
Michael Fleming, Federal Reserve Bank of New York
Warren Hrung, Federal Reserve Bank of New York
Frank Keane, Federal Reserve Bank of New York

Funding Liquidity Risk: Definition and Measurement
Mathias Drehmann, Bank for International Settlements
Kleopatra Nikolaou, European Central Bank

Provision of Liquidity through the Primary Credit Facility during the Financial Crisis: A Structural Analysis
Erhan Artuc, Koc University
Selva Demiralp, Koc University

Pilot Error

Oh well:

Investigators examining last week's Continental Connection plane crash have gathered evidence that pilot commands -- not a buildup of ice on the wings and tail -- likely initiated the fatal dive of the twin-engine Bombardier Q400 into a neighborhood six miles short of the Buffalo, N.Y., airport, according to people familiar with the situation.

The commuter plane slowed to an unsafe speed as it approached the airport, causing an automatic stall warning, these people said. The pilot pulled back sharply on the plane's controls and added power instead of following the proper procedure of pushing forward to lower the plane's nose to regain speed, they said. He held the controls there, locking the airplane into a deadly stall, they added.

The Snow melts

What happens if you have snow on the ground for six weeks, the first time we've had snow cover for this long with this house.  I believe this is tunneling by chipmunks.  Should be easy to fix with a bit of topsoil and grass seed.   

 

Stanford Update

Clusterstock writes:

This was buried at the end of a NYT report:

The current S.E.C. charges stem from an inquiry opened in October 2006 after a routine exam of Stanford Group, according to Stephen J. Korotash, an associate regional director of enforcement with the agency’s Fort Worth office.

He said the S.E.C. “stood down” on its investigation at the time at the request of another federal agency, which he declined to name, but resumed the inquiry in December 2008.

Who told the SEC to stand down. Given that he was a fraudster, it's almost impossible to think of a benign explanation for this, particularly given Sir Allen Stanford's political tentacles.

Yale Law School Conference on the Crisis

James Kwak points to a YLS conference I'd missed:

If you are a true crisis junkie (or you are having trouble falling asleep tonight and need more to read), my own Yale Law School held a conference on the financial crisis, its causes, and potential solutions (including better regulation) on Friday. There were a number of famous names present, including Lucian Bebchuk, Christopher Mayer (of the Hubbard-Mayer proposal), Anil Kashyap, and others. You can look at the agenda or check out the readings for sessions one, two, three, and four (each includes links to PDFs of the papers).

Back of the Envelope Welfare Calculations for the Fiscal Stimulus

Greg Clark --- the economic historian -- writes:

I am no macroeconomist. And I am reluctant to get trampled in a clash of macroeconomic titans. But I find Brad's various arguments, particularly his reductio ad absurdum, convincing. And I think Obama is right to try a fiscal stimulus from the following simple chain of argument:

(1) There is no logical reason why a stimulus cannot work -- it is a matter of empirics whether it will work or not, depending on the reactions of various economic actors.

(2) Because of the absence of controlled experiments over the last 80 years we do not know whether a stimulus will actually increase output (though Christina and David Romer have some decent evidence from the US that it will).

(3) Even if the stimulus package does not produce one extra job, the social cost of the stimulus is a fraction of the $789 billion being spent, since the tax reductions, unemployment benefits, aid to states and educational and health investments all have some value. The true social cost, absent any output gains, is likely $100 billion or less.

(4) The potential gains are huge. If the multiplier really is as high as the 1.9 sometimes found in Econ 1 texts such as Greg Mankiw's, then the social gain from the $100 billion expense could be as much as $1,400 billion. It is a risk, for sure, but those seem like attractive odds at which to gamble.

(1) - (4) amount to a version of Pascal's Wager -- on why the prudent person should believe in God -- but applied to more mundane economic concerns.

I'm happy to see this sort of calculation, but this one doesn't seem quite right, to the extent to which I can follow what Clark is doing.  What assumptions is Clark making?  Which just suggests I should write my own back of the envelope calculation.  I'm working on it....

One issue is that one needs to think about the optimal mix of fiscal and monetary policy at the same time.  Doing optimal fiscal policy without considering what monetary policy is actually doing or ought to be doing makes little sense.   And I don't believe all this hand wringing about monetary policy having come to the end of what can be done.  Though it is usually put, if people are careful, as 'having come to the end of what conventional monetary policy can do' -- but that's just question begging.  Setting fed fund target always worked because of the expectation agent have for what it means for the future course of interest rates, and the Fed can still announce a policy rule for future fed funds targets that expands demand.  Say close to zero fed funds target until the CPI level crosses a certain level from below, with this trigger CPI level above where the CPI is now and growing at about 2% per annum.   That would increase asset demand quickly.  One could also use some credible house price index instead of the CPI.

Why doesn't the Fed adopt an effective monetary policy stance along these lines?  They still seem to worry about loosing their reputation for being tough on inflation and don't want to confuse the markets by engaging in policy innovation (while at the same time arguing that the sophisticated market participants know they are already doing something sort of like this or will soon do something like this, without the need to be explicit, which makes little sense if the point of the policy is to revive demand).  Well, I just don't think those two problems have a good intertemporal trade-off right now: if the economic situation deteriorates further because of lack of aggregate demand and asset price falls, the Fed is going to face a more difficult situation in the future and is going to end up having more inflation and more policy innovation in a tougher economic and political environment. 

One more question: one sneaky policy would be to issue a lot of government long-term nominal debt and then inflate it away.   But it is my impression that most US government debt remains quite short term, under five years in maturity.  But it would be good to check.  I've not found any tables online that are easy to read, not behind subscription walls, and I'm not going to do the work to read the raw tables. 

The effects of Blog Readers and RSS

via Drum:

From James Joyner, musing on how the blogosphere has changed in the past six years:

The rise of RSS readers and aggregators like Memeorandum mean that fewer of us are using our blogrolls or just keeping a log of interesting things we’re finding on the Web; instead, we’re much more apt to write about what everyone else is writing about.

I'm not quite sure I'd agree that RSS and Memeorandum are to blame for this, but there's not much question that the blogosphere is more herdlike than it used to be.  Not a change for the better, I'd say.

Which reminds me that I want to put up a new sort of post this evening, instead of my usual cut and paste approach. 

Recovery without Credit?

Ricardo Hausmann points to a 2006 paper by Calvo et.al. to make the claim that 'credit crunches often lead to recessions, but the eventual recovery has never been lead by credit.'

Guillermo A. Calvo, Alejandro Izquierdo, Ernesto Talvi, Phoenix Miracles in Emerging Markets: Recovering without Credit from Systemic Financial Crises

Using a sample of emerging markets that are integrated into global bond markets, we analyze the collapse and recovery phase of output collapses that coincide with systemic sudden stops, defined as periods of skyrocketing aggregate bond spreads and large capital flow reversals. Our findings indicate the presence of a very similar pattern across different episodes: output recovers with virtually no recovery in either domestic or foreign credit, a phenomenon that we call a Phoenix Miracle, where output “rises from its ashes,” suggesting that firms go through a process of financial engineering to restore liquidity outside formal credit markets. Moreover, we show that the U.S. Great Depression could be catalogued as a Phoenix Miracle. However, in contrast to the U.S. Great Depression, EM output collapses occur in a context of accelerating price inflation and falling real wages, casting doubt on price deflation and nominal wage rigidity as key elements in explaining output collapse, and suggesting that financial factors figure prominently in these collapses.

This seems a bit confused: does credit recover or not?  Measured credit does not recover, but unmeasured credit does?  The policy implications are also unclear, since the lack of good recoveries might be alleviated by having better policies to restore formal credit channels.  Reading the paper might help.

Joint Chiefs of Staff want to order 60 additional F-22s

Not clear to me how to interpret this:

The Air Force’s chief of staff was careful to withhold his professional military advice until Defense Secretary Robert Gates gets it, but Gen. Norton Schwartz told reporters this morning that he would not “dispute” comments by the chairman of the Joint Chiefs late last year that the service would get an additional 60 F-22s, for a total of 243. ...

The Air Force chief of staff defended the decision to scale back the long sacred Air Force requirement of 381 F-22s, saying the service had performed honest and objective analysis to determine the new number of planes. “I’ll be happy to defend the numbers once they become available,” he told us, adding that the new fleet size offers “moderate risk” to the nation.

Of course, this doesn’t necessarily mean that 60 is the exact number everyone has decided on, but Schwartz didn’t try to pour cold water on it either… He did say the final decision should be out very close to the congressionally mandated date of March 1.

The timing would explain some of the very positive press attention to the F-22.  I sort of like the F-22, but the cost is a problem.  But the marginal cost isn't that high (numbers????).  The total cost of the program is more a warning that the development process needs to get cheaper. 

Update #1: the Air Force's cost numbers from 2006:

One roadblock to more Raptors is the aircraft's high cost. Estimates for the fighter jet range from as little as $132 million to as much as $312 million. So far, the Air Force has invested as much as $28 billion in the Raptor's research, development and testing. That money, referred to as a "sunk cost," is already spent and is separate from money used for future decision-making, including procuring a copy of the jet.

By the time all 183 jets have been purchased, around $28 billion will have been spent on research and development. An additional $34 billion will have been spent on actually procuring the aircraft. That's about $62 billion for the total program cost. Divided out, that's comes to about $338 million per aircraft.

But the reality is, if the Air Force wanted to buy just one more jet, it would cost the taxpayer less than half that amount. The current cost for a single copy of an F-22 stands at about $137 million. And that number has dropped by 23 percent since Lot 3 procurement, General Lewis said.

"The cost of the airplane is going down," he said. "And the next 100 aircraft, if I am allowed to buy another 100 aircraft ... the average fly-away cost would be $116 million per airplane."

Caballero takes the Contrarian view of Bank Nationalization

As expected, Caballero has a contrarian view of bank nationalization:

There are two types of arguments for nationalisation. One argument is a gut reaction that enough-is-enough and we must stop transferring resources to Wall Street’s “crooks and oligarchs.” This reaction only adds fuel to the fire and exacerbates self-destructive mob-mentality behaviour.
We need to stop this. The second argument is more reasoned and wonders whether it is not too late for any other solution. At current prices banks are either insolvent or will soon be, hence the only option is a time-out in which the government takes control of some of these banks, at least temporarily.

While I sympathize with this second view on the underlying premise that policy has been behind the curve and the call for a time-out, I disagree with its policy conclusion. This view takes for granted that nationalisation would buy us the time-out. I think this will do just the opposite.   ...

There are at least two reasons why nationalisation is likely to backfire: First, there are no (sensible) prices for the key assets in the balance sheets of financial institutions. Uncertainty and fear have ravaged all types of explicit and implicit financial insurance markets, destroying any sensible metric for the fundamental valuation of almost every risky asset. But without these prices, any decision of who is insolvent and needs to be nationalised is arbitrary.

Wherever the line is drawn, the fear of nationalisation will swallow the next financial institution, and then the next one, and so on. ...

The second reason.. is that the interlinkages of the modern financial systems are too complex to risk major dilution of any stakeholder in this jittery environment. We do not know the systemic impact of such an action. This complexity interacts with uncertainty aversion, and could trigger massive flight-to-quality episodes. ...

But if nationalisation is not an option, how do we get the time-out? My preferred (part of the) solution is to provide universal insurance for the assets that are currently clogging the balance sheets of banks and other financial institutions.

For now, this insurance should be provided at pre-crisis prices for the corresponding asset class (or one notch below). This arrangement should be coupled with tight monitoring of the insured institutions and with retroactive punishments a few years down the road to those institutions (and their management) whose assets underperform relative to their asset class. This retroactive punishment is needed to limit adverse selection problems, where banks insure their worst assets without declaring them as such.

Another important aspect of this insurance arrangement is that it effectively removes from these institutions much of the burden of holding aggregate risk in a volatile environment. While some of these financial institutions played an important role in causing the crisis, a significant share of the losses of the surviving financial institutions stem from poor policy responses, which have exacerbated the systemic problem.

There is no reason to concentrate the cost of the policy mistakes on these institutions. Once this risk is removed from their balance sheet, the short-run need for recapitalization which is behind the nationalisation push is eliminated, and we can wait until normality returns for financial institutions to rebuild their capital if the need is still present. ...

US Treasury Secretary Tim Geithner’s proposal has elements of both approaches, and it is probably as much as he could get in a heavily-politicised environment. Coupled with the bad bank arrangement and guarantees for private asset buyers, it resembles the insurance solution described above.

This mechanism appears more complex to jump start than the insurance one as it depends on more private sector decisions, and it transfers much of the upside to private capital rather than to the financial institutions that have been hurt the most by the systemic crisis.

I need more elaboration than Caballero provides here. 

$8 billion Ponzi Scheme?

Bloomberg reports that the SEC makes it official (this has been going around on blogs for a week, along with complaints that the MSM isn't crediting blogs but is only willing to transcribe what the SEC and FBI sources say):

U.S. regulators accused R. Allen Stanford of running a “massive, ongoing fraud” while selling about $8 billion in certificates of deposit through investment firm Stanford International Bank Ltd.

The Securities and Exchange Commission filed legal papers against him and two other people at Dallas federal court today seeking a temporary restraining order, court records show.

Update #1:

• SEC statement | SEC complaint

Not clear how much this is a Ponzi Scheme and how much just illegal return smoothing.  There may be significant recovery for investors, unlike Madoff. Or maybe not, with a slow investigation allowing assets to be stripped:

In its complaint, the S.E.C. said it could not account for the $8 billion in assets that were housed in the Antigua bank after issuing subpoenas for bank records and to various witnesses.

Update #2: Felix Salmon summarizes the highlights of the SEC complaint. For instance:

"Tier 3" assets of SIB -- "unknown assets under the apparent control of Stanford and Davis" -- accounted for 81% of the Bank's investment portfolio as of December 2008.

Also lots of nice local color at the FT. 

Update #3: More Salmon:

It's also worth asking whether it's purest coincidence that the SEC action comes exactly one week after questions about Stanford started being raised in the media (a/k/a my blog). They slowly investigate for months if not years, and then the minute the story hits the press they're suddenly ready to go to court? Weird. After all, my blog entry just piggybacked on analysis performed by Alex Dalmady back in October -- analysis which he only got around to writing up in January.

Update: Goldstein now puts the duration of the SEC investigation at "about two years".

Sabotage Operations against Iran

via Der Spiegel, The Daily Telegraph, often prone to sensationalist writing, reports.

Beating up on Tim Geithner

Clusterstock beats up on Tim Geithner.  I'm also puzzled about how Geithner got to be Treasury Secretary and I'm not yet at all comfortable with Geithner.  

Apparently Tim Geithner's much heralded banking rescue proposal went over like a lead balloon. The rap against Geithner is that he failed to present a detailed plan, seemed to lack creditibility, didn't make a commanding or inspiring presentation--someone described him as an "elf reading a book report"--and dithered, switching plans at the very last minute. It's hard not to be a bit cynical when it comes to Geithner's critics? What exactly did you expect from Geithner? The man spent his life as a pseudo-academic, behind the scenes bureaucrat. Until the destruction of Bear Stearns, he was virtually invisible to the public. And after that, he was more than willing to play fourth fiddle to Ben Bernanke, Hank Paulson and Sheila Bair. ...

Expecting Geithner to exude the confidence we've come to expect from corporate or political leaders is just childish. Nothing on his resume suggests Geithner has the kind of experience or personality that lead to inspirational leadership. Keep in mind that Geithner's never run for dog catcher, much less a board seat or any executive position.

He's a nudge, a guy with stacks of papers, a couple of ideas and the kind of non-public arrogance bred inside of bureacracies. What does it mean to possess "non-public arrogance?" It's the arrogrance of behind the scenes experts. He thinks he's right, and it's annoying that other people get to second guess him. Think of John Malkovich's character from Burn After Reading.

Wiki describes Geithner's early career as:

He then attended Dartmouth College, graduating with an A.B. in government and Asian studies in 1983.^[8] He earned an M.A. in international economics and East Asian studies from Johns Hopkins University's School of Advanced International Studies in 1985.^[8][9] He has studied Chinese^[8] and Japanese.^[10]

After completing his studies, Geithner worked for Kissinger and Associates in Washington, D.C., for three years and then joined the International Affairs division of the U.S. Treasury Department in 1988. He went on to serve as an attache at the US Embassy in Tokyo. He was deputy assistant secretary for international monetary and financial policy (1995–1996), senior deputy assistant secretary for international affairs (1996-1997), assistant secretary for international affairs (1997–1998).^[9]

He was Under Secretary of the Treasury for International Affairs (1998–2001) under Treasury Secretaries Robert Rubin and Lawrence Summers.^[9] Summers was his mentor,^[11][12] but other sources call him a Rubin protégé.^[12][13][14]

The WP explains some context for how Geithner's bad presentation last week happened:

Just days before Treasury Secretary Timothy F. Geithner was scheduled to lay out his much-anticipated plan to deal with the toxic assets imperiling the financial system, he and his team made a sudden about-face.

According to several sources involved in the deliberations, Geithner had come to the conclusion that the strategies he and his team had spent weeks working on were too expensive, too complex and too risky for taxpayers.

They needed an alternative and found it in a previously considered initiative to pair private investments and public loans to try to buy the risky assets and take them off the books of banks. There was one problem: They didn't have enough time to work out many details or consult with others before the plan was supposed to be unveiled.  ...

The clock was ticking. But Geithner wasn't ready to share his thoughts with senior government officials outside his narrow circle. He and his team worked on the plan through the weekend, with some of his staff working until 4 a.m. The team grew to about 20 officials, including lawyers, finance experts and public affairs staff....

On Saturday, Feb. 7, the officials won a slight reprieve when the White House asked that Geithner's speech be postponed from Monday to Tuesday to allow Congress to focus a little longer on the on the massive economic stimulus package still pending.

But there still was not enough time to sculpt the detailed plan that the financial markets expected. In the end, Geithner and his colleagues decided that it would be better to take flak for being vague than publicly offer half-formed details that might later have to be revised. And ambiguity, the officials concluded, would make the plan an easier sell on Capitol Hill, as congressional leaders could be brought into the discussions of details rather than be presented a detailed plan as fait accompli.

So these guys are indeed, in some ways, like me. 

Update #1: as usual, Doug gets to the point better than me:

As someone who did a similar master's degree, many years ago, and as someone who is familiar with programs of this kind, I am pretty confident that Geithner's master's training at SAIS would not have included any serious [economics]. Presumably he has picked up some tools along the way, but he is at best a consumer of economics research rather than a producer. I'm not sure that's a bad thing for a policy maker, but it would be interesting to know how firm a grasp he has of the literature on, say, dynamic consistency.

The problem is that I don't know.  Nor does there seem to be any public record that Geithner gets it. 

Badly Crafted Restrictions on Executive Pay in the Stimulus Bill?

Clusterstock writes:

Lucian Bebchuck, who was perhaps one of the most famous critic of executive pay long before the current crisis, tears into the blindingly stupid restrictions on pay that were shoved into the stimulus bill at the last minute by Connecticut Senator Chris Dodd. The new plan is far worse than anything President Barack Obama proposed, and may end up leaving out bailed out banking institutions even sicker than they are now.

•  Destroys Incentive Pay Structure. While Obama proposed restricting pay that was unrelated to performance, the Dodd plan hits incentive compensation, limiting it to one-third of total pay. This will just make executives less interested in the long-term overall performance of their firm, by sapping their financial incentives.

• Mandates Restricted Stock For Incentive Comp. Awarding restricted stock for top executives, who have broad responsibilities for their firm's performance, makes sense. But prohibitting other firms of incentive pay for lower level employees, who participate in their company's performance in only limited ways, is a recipe for trouble. Their pay should be limited to making their unit perform well. We want managers to concentrate on a bank's overall performance. We don't want a stock broker second guessing a bond trader. It's sure to lead to organizational chaos.

• Pay Caps Encourage "Betting The Bank." Germany attempted to require restrictions on pay for banks that took public bailout funds. It quickly discovered that many bankers would rather risk their bank failing than accept pay caps. "This encourages the managers to bet the bank – heads I win (and get paid), tails you lose (bank goes bust)," law professor Larry Ribstein writes. Except to see banks rushing to pay back TARP, paying themselves billions in bonuses all over again, and then creating the specter of failure.

Restricted Stock Also Encoruages Betting The Bank. "Consider the case where an infusion of additional capital would greatly dilute the value of common shares but would be best for the bank, while failing to get that capital would put the bank's future at risk," Bebchuck writes. "In such circumstances, compensation in restricted common shares would provide executives with an incentive to avoid raising capital (which would wipe out their shares' value) and gamble on survival without additional capital." In short, once again its a smarter bet for a banker to risk his firm for personal gain than accept limited gains for a more secure balance sheet. If that strikes you as insanely risky, you probably don't work on Wall Street. Top bankers didn't get to be that way by being afraid of risk.

Clusterstock goes on:

A lot of people have been looking at the changes to compensation limits included in the stimulus bill and wondered: "Hey can they do that?" Can the government really unilaterally change the terms of the deal with banks that have already taken TARP funds? Isn't that a bit unfair?

As my father used to say, life is unfair. And so is the TARP. Included in each of the contracts the banks signed with the government to get TARP funds is a short section that makes it clear that they are now completely at the mercy of the government.

Ted Frank explains the situation in The American Spectator:

TARP's "Securities Purchase Agreements" each contain a Trojan Horse clause, Section 5.3, stating that Treasury may "unilaterally amend" the agreement to comply with changes in federal statutes. In short, Congress has the power to retroactively amend the terms of the bailout...

Keep in mind that this has a plus side. It allows the government to quickly react to any shenanigans from banks to abuse the TARP program. The government is at a huge disadvantage when negotiating deals with investment bankers, folks who do this kind of thing for a living. Allowing the government to revisit the deals once they have begun to operate is a great advantage.

As Ted Frank explains, Section 5.3 is there since the government lost a in court back during the S&L bailout when it tried to close loopholes banks were exploiting, see United States v. Winstar Corp (1996).

Perverse Incentives created by supermajority voting rules in legislatures

MY writes:

As the state of California slides into financial apocalypse because the state legislature’s GOP minority refuses to compromise even a tiny bit in the face of a requirement that a budget pass by a two-thirds vote, it’s time to ponder the perversities of countermajoritarian requirements of this sort. Say that things get really horrible in California as a result of this standoff. It’s possible that the voters will respond by throwing out the minority obstructionists. But it’s also possible—likely, even—that the voters’ sense of accountability isn’t that fine-grained. When terrible things happen, the public decides to “throw the bums out”—i.e., incumbents in general, i.e. mostly Democrats since they’re in the majority.

Austrian and Swedish Bank Downgrades

Bloomberg reports viz. Austrian and Swedish bank exposures to Eastern Europe:

Austrian, Swedish and other banks with subsidiaries in eastern European may face rating downgrades as economies in the region deteriorate, according to Moody’s Investors Service.

East European banks, which are mainly subsidiaries of financial institutions such as Raiffeisen Zentralbank Oesterreich AG and Swedbank AB, are likely to come under “downward pressure” which may also weaken their parent companies, Moody’s wrote in a report released today in London.

Banks from Austria, Italy, France, Belgium, Germany and Sweden account for 84 percent of western European bank loans in eastern Europe. The region’s economies are weakening, with the International Monetary Fund already offering aid to Latvia, Hungary, Serbia and Ukraine. Bailouts may be extended to Bulgaria, Romania, Lithuania and Estonia as the global recession derails more banks, according to Capital Economics research.

Lucian Bebchuk on 'How To Make TARP II Work'

via James Kwak, I see Lucian Bebchuk has a paper on 'How To Make TARP II Work.'  The abstract:

Treasury Secretary Geithner announced a plan, which the Treasury is willing to finance with up to $1 trillion of public funds, to partner with private capital to buy banks' troubled assets. The Treasury has not yet settled on the plan's design, and its announcement has encountered substantial skepticism as to whether an effective plan for a public-private partnership in buying troubled assets can be worked out. This paper argues that, yes, it can. The paper also analyzes how the plan should be designed to contribute most to restarting the market for troubled assets at the least cost to taxpayers.

The government's plan should focus on establishing a significant number of competing funds that will be privately managed and dedicated to buying troubled assets - not on creating one, large public-private aggregator bank. Establishing competing funds, I show, is necessary both to securing a well-functioning market for troubled assets and to keeping costs to taxpayers at a minimum.

Each new fund will be partly financed with private capital, with the rest coming (say, in the form of non-recourse debt financing) from the government's Investment Fund planned by the Treasury. One important element of the proposed design is a competitive process in which private managers seeking to establish a fund participating in the program will submit bids as to what fraction of the fund's capital will be funded privately. The government will set the fraction of each participating fund's capital that must be financed with private money at the highest level that, given the received bids, will still enable establishing new funds with aggregate capital equal to the program's target level. Overall, I show that the proposed design will leverage private capital to the fullest extent possible and will provide the most effective and least costly mechanism for restarting the market for troubled assets.

The problem is that the government still needs to subsidize the purchase ex-ante or take on considerable badly priced risk ex-post, and the question is how to do that best within this framework.  And then there is the question of why this is a good idea, as opposed to creating via  bankruptcy, nationalization and then privatization, or a much more expansionary monetary policy that would improve nominal property collateral values.   In general, I could see the public finance point of buying bad assets cheaply and then raising their value via monetary policy, but why do that if monetary policy could raise the value of these assets in banks need to be recapitalized via nationalization?  

Just looking at this problem from a microeconomic contracting persective doesn't address the important qustion of why do this in the first place, where the motivation might --- if elaborated -- suggest doing things differently. 

TTL capable PocketWizards are out

Reviews at Strobist and Rob Galbraith.  The lack of through-the-lens metering for radio remote triggered flash until this year -- Radiopopper's new system also out this year is the alternative -- is one thing I didn't expect when I got into the DSLR world in late 2007. 

Not that I use anything other than a Canon 580 EXII for on camera flash right now. 

Break up the big banks

I just want to second Simon Johnson's call for breaking up the big banks (something I've been thinking about for while, not so much on my blog though):

The banking lobby has become too powerful, in large part because big banks have balance sheets that are too big relative to the size of the economy.  If a bank has total assets of over 10% of GDP, it is obviously too big to fail.  Of course, the smart people who run these banks know this and act - politically and economically - accordingly.

We need a strong system of financial intermediation, and this must feature people willing to take risks with their own capital.  In that context, there may be efficiency arguments in favor of relatively large deposit-taking/lending banks (although I’m far from convinced), but it is the political economy considerations that are overwhelming.  When all is said and done, if we still have large banks with great political power, we will eventually find ourselves in even bigger trouble.

Not sure that this is the right analysis of bank power since you don't need large banks to create bank power, but large banks are nevertheless political problems that need to be dealt with, with break-ups and size caps being the most straighforward way of doing so.  Not that this will make banks political non-problems, but it would put them on an more even playing field with hedge funds and car dealers. 

Calculated Risk adds:

From Diana Golobay at Housing Wire: Break Up Big Banks, Says Community Banker

Rusty Cloutier, the president and CEO of MidSouth Bank, recently told major news outlets that “[c]oncentration is a bad thing” and called for the feds to break up the “miserable eight” largest banks that, he said, control 60 to 64 percent of the country’s assets, restoring competition to the banking industry and restoring investor confidence in the system.

This is an excellent point. Most of the big banks can't raise capital because investors are afraid of nationalization preprivatization. And small banks can't raise capital because investors are concerned that their competitors (the large banks) will be continuously bailed out by the government.

Potentially Good News for the War on Drugs

See the NYT:

The anticipated selection of Chief Kerlikowske [as head of the Office of National Drug Control Policy, known as the drug czar] has given hope to those who want national drug policy to shift from an emphasis on arrest and prosecution to methods more like those employed in Seattle: intervention, treatment and a reduction of problems drug use can cause, a tactic known as harm reduction. Chief Kerlikowske is not necessarily regarded as having forcefully led those efforts, but he has not gotten in the way of them.

“What gives me optimism,” said Ethan Nadelmann, executive director of the Drug Policy Alliance, “is not so much him per se as the fact that he’s been the police chief of Seattle. And Seattle, King County and Washington State have really been at the forefront of harm reduction and other drug policy reform.”

The White House has yet to announce the nomination of Chief Kerlikowske, and a spokesman for the Seattle police said the chief would not discuss the matter. His appointment would require Senate confirmation.

Chief Kerlikowske, 59, became police chief in Seattle in 2000, after serving as a deputy director for community policing at the Justice Department in the Clinton administration. While there he worked with Eric H. Holder Jr., then a deputy attorney general and now the head of the department.

Before going to the Justice Department, Chief Kerlikowske was the police chief in Buffalo and in Fort Myers and Port St. Lucie in Florida. Under John P. Walters, the drug czar during most of the administration of President George W. Bush, the drug office focused on tough enforcement of drug laws, including emphases on marijuana and drug use among youths. The agency pointed to reductions in the use of certain kinds of drugs, but it was criticized by some local law enforcement officials who said its priorities did not reflect local concerns, from the rise of methamphetamine to the fight against drug smuggling at the Mexican border.

“The difference is I’ll be able to call Washington and get ahold of Gil and he’ll answer the phone,” said William Lansdowne, the police chief in San Diego and a member of the board of the Major Cities Chiefs Association. Chief Kerlikowske is the president of the association. “He listens. He’s very open to new ideas. He’ll build cooperation.”

Chief Lansdowne added, “He’ll take a look at prevention as much as enforcement.”

Why didn't Bush pardon Libby?

Laura Rozen speculates:

for various reasons, I never thought Bush would pardon Libby either. Among other reasons, the record shows that Bush had been pretty stingy with pardons while Texas governor, even when it would have been politically opportune for him to do so. Secondly, were Libby pardoned, it would preclude him from being able to take the fifth should he ever be asked by a Congressional committee to testify about the role of Cheney and the President in the Plame matter. Now, unpardoned, he can still plead the fifth to avoid doing so, which may be in the former president's interest.

Update #1: on the other hand, Bush did commute Libby's 30 month prison sentence. 

Laws of War Models and US Civil War History

John Fabian Witt -- a 2000 Yale J.D. moving to Yale Law School next fall, already having tenure at Columbia -- has a nice write-up of different models for understanding the Laws of War in the context of the US Civil War. 

When the shooting started at Fort Sumter on April 12, 1861, Lincoln became a war president barely a month into his first term in office. As a novice commander in chief, his inclination was to deny that the international laws of war had any relevance to the South's war of rebellion. The rebels were criminals, he insisted, not soldiers. Members of Congress and European statesmen pressed him to take international law more seriously. But Lincoln dismissed "the law of nations," as international law was then called, as a curiosity that country lawyers like him knew little about.

Lincoln's skepticism about the laws of war culminated a year later, in July 1862, in one of the Civil War's most famous early scenes. After weeks of deadly fighting and a demoralizing Union retreat in Virginia, Lincoln traveled to the front lines to encourage more aggressive action by Gen. George McClellan's Army of the Potomac. To win the war, Lincoln was beginning to think, the Union would have to attack the social fabric of the South. But McClellan resisted. The man known as "Little Napoleon" was one of the few Americans versed in the highly idealized rules of war handed down by the professional armies of 18^th-century Europe. As McClellan saw it, the more aggressive campaign that Lincoln urged would undermine the European laws that had sought to make war resemble a kind of gentleman's duel.

Instead of embracing Lincoln's new urgency, McClellan lectured Lincoln on the laws of civilized warfare and the sharp constraints they placed on his prosecution of the Union war effort. A war among Christian and civilized people, he told the president, should not be a war against the people of the rebellious states, but a war between armies. He warned against the seizure of private property and especially against the "forcible abolition of slavery." Civilized wars, in McClellan's conception, left the fabric of society virtually untouched.

Lincoln grasped immediately that McClellan's conception of the laws of war would make it virtually impossible to win the war and preserve the Union. Just when a more aggressive war effort was required, McClellan was advocating rules of engagement that would have treated the South with kid gloves. At this same time, Lincoln was encountering a series of excruciatingly difficult problems that led him to reconsider his previous disdain for laws of war. On the high seas, the powerful nations of Europe demanded that the Union adopt a consistent set of predictable rules in its treatment of vessels from neutral foreign states. In the South, Jefferson Davis denounced Lincoln's decision to execute Confederate commerce raiders as pirates and threatened to retaliate in kind against captured Union soldiers. And in the West, guerilla fighting among civilians on both sides threatened to drag the conflict into a war of unremitting slaughter and destruction.

Most of all, Lincoln's increasingly firm conviction that the war needed to be brought home to the people of the South—and to the slave system on which they depended—cried out for new rules. After meeting with McClellan, Lincoln began to think about what advantages new laws of war might offer the Union effort.

Pigs at Work