Notes on Lehman Bankruptcy

Very interesting post on a blog that I never heard of before. This is the kind of information difficult to know unless one is an insider or one who researches the minute details of regulations and laws.

Krugman on Scrooge

Paul Krugman had a column shortly before Christmas in which he compared Scrooge to many Republicans. He notes that Charles Dickens' Christmas classic is actually a left-wing tract. However, I wonder if he endorses all of Dickens' work. According to the excellent book, HOW THE DISMAL SCIENCE GOT ITS NAME, Dickens wrote BLEAK HOUSE as an antidote to UNCLE TOM'S CABIN, with the purpose of showing that the suffering of white factory workers was more severe than the suffering of black slaves. Like Thomas Carlyle, who coined the term "dismal science" in an article entitled, "On the Negro Question," Dickens believed that whites were superior to blacks and that enslavement of blacks apparently was fine. I recognize that endorsing one opinion of a particular writer doesn't imply that one endorses all the opinions, but since Krugman is so quick to tarnish with a broad brush, maybe it is justified in this case.

Current Policy as Reason for Concern

Christina Romer's column in Sunday's New York Times offers her judgment on the affect that uncertainty is having on the economic recovery. She discusses several concerns that are in the popular press and on shows like SquawkBox. These concerns are the fate of the Bush tax cuts, and environmental regulation. (I think she leaves out some though). She argues the biggest concern is uncertainty over the health of the economy. Her solution for resolving this uncertainty is a reaffirmation from the president, Congress, and the Fed that they will do whatever is necessary to create jobs. Fiscal and monetary policy must be expansionary, but a plan for tackling the long-term budget problems should be developed also.

It appears she is calling for additional fiscal stimulus. She is sticking with a Keynesian approach for the current state of the economy. But, she is ignoring the housing market. The wealth of most households is impacted more by changes in the value of their homes than in their portfolios. Further, housing is part of the real economy. The inventory of houses still exists, defaults and foreclosures continue to occur, and many others are still under water. The housing market is no where close to a new equilibrium as yet. I believe both Romer and those still in the Obama Administration are focusing on the wrong solutions because they misinterpret the problem.

Ben Bernanke was on 60 Minutes last night. He defended Fed policy, including the current round of quantitative easing. He noted that the Fed can change interest rates on very short notice so that they can reverse their policy when the time is right. When asked how confident he was that the Fed could achieve the necessary reversal at the right time, he replied, "100 percent." I hope and trust that this comment was for the sake of public confidence. If he literally is that confident in the Fed's ability to turn quantitative easing around and that they can know when the proper time to do so, then I am very nervous. Economists have no reason for such hubris. When we think that we can control the economy or fine tune the economy, or act like engineers, it is time to panic.

Mankiw on Taxes and Spending

Mankiw's column in yesterday's New York Times is worth a read. He discusses tax and spending policies, noting how a tax credit is often like a spending increase. He argues, as do most economists, that the tax rate should be lowered and the base extended. The latter is done, at least in part, by removing many credits and deductions.

John Cochrane on Geitner's Proposal at the G-20

Today's WSJ has an interest op-ed piece by John Cochrane. Secretary of the Treasury Geithner called for G-20 countries to undertake policies that would reduce external imbalances below some specified share of GDP. It appears that Geithner is most concerned about China's trade surplus with the U.S. However, the U.S. has a trade deficit with many countries other than China.

China saves a lot more that the U.S., partially because China lacks a social security system. The only way middle-aged adults can plan for retirement is by saving today. It often appears that Americans believe social security provides a better retirement than it does since so many don't save much. However, one positive outcome of the recent financial and economic crisis is that Americans are saving more and borrowing less.

Cochrane points out several problems with Geithner's proposal. First, how does anyone know the proper amoung of saving any given country should have? Second, countries at different levels of development will have different outcomes with respect to trade balances. The U.S. borrowed abroad to fund the railroads in the 19th Century. Cochrane also points out that promises to fix our long-term problems later are hardly enforceable. Finally, there is a strong notion of an ability for government and international agencies to plan the operation of modern economies.

Cochrane's piece is worth a read.

Two Links of Interest

Saturdays WSJ had an interesting op-ed by Joseph Stiglitz on why quantitative easing will not succeed. The linkages between quantitative easing and business activity are tenuous, which seems to be the case to me as well.

On a different area, Bernanke gave a talk today about housing markets. His written remarks are here.

Bernanke's Speech

Here is the link to the speech Bernanke is giving at a conference for the Boston Fed.