Category: Equitablog

As I continue to try to worry–without great success–the question of just where the increases in financial instability produced by the prolonged period of past and expected future extremely low interest rates and by quantitative easing comes from…

Two sources of risk:

1. Sudden downward revisions in the expected future cash flows of underlying real assets that back financial assets.
2. Sudden upward revisions in the rate at which expected future cash flows are discounted.

To recap my thinking before now:

Over at Equitable Growth: Larry Elliott: IMF warns period of ultra-low interest rates poses fresh financial crisis threat: “The Washington-based IMF said…

…that… the risks to stability… c[o]me from the… shadow banking system… hedge funds, money market funds and investment banks that do not take deposits from the public. José Viñals, the IMF’s financial counsellor, said:

Policymakers are facing a new global imbalance: not enough economic risk-taking in support of growth, but increasing excesses in financial risk-taking posing stability challenges…. Risks are shifting to the shadow banking system in the form of rising market and liquidity risks. If left unaddressed, these risks could compromise global financial stability.

The stability report said low interest rates were “critical” in supporting the economy because they encouraged consumers to spend, and businesses to hire and invest. But it noted that loose monetary policies also prompted investment in high-yield but risky assets and for investors to take bigger bets. One concern is that much of the high-risk investment has taken place in emerging markets, leaving them vulnerable to rising US interest rates…. The IMF said there was a trade-off between the upside economic benefits of low interest rates and the money creation process known as quantitative easing and the downside financial stability risks… developments in high-yielding corporate bonds were “worrisome”, that share prices in some western countries were high by historical norms, and that there were pockets of real estate over-valuation…

I have come to the conclusion that those who say that quantitative easing has increased systemic financial-market risks have simply not thought hard enough about what quantitative easing is. In quantitative easing the central bank takes duration risk off of the private sector’s balance sheet and onto the governments, that is, the taxpayers’. The ratio of risk to be borne to private-sector risk-bearing capacity falls. The presumption is that this makes financial markets less, not more, vulnerable to systemic risk. You could tell some kind of complex contrarian story with demand and supply curves that slope in non-obvious ways. But none of those who say that quantitative easing increases systemic risk make such arguments–and if they understood quantitative easing properly, they would understand that they need to and feel impelled to do so.

The argument that ultra-low interest rates and the anticipated continuation of ultra-low interest rates for a considerable time period raises systemic financial risks is less mired in the, well, mire. But it, too, is not obvious. An economy sinks into depression when households, savers, and businesses in aggregate believe that they are short of the assets they need to hold to ensure liquidity–that after subtracting off assets they are holding as savings vehicles they do not have enough cash and enough safe nominal assets that could be pledged to immediately raise cash. As a result, the aggregate of households, savers, and businesses try to cut their spending below their income in order to build up their liquid cash and safe collateral balances; but since my income is nothing more than your spending, they fail and so production, income, and spending fall until the private sector finds itself so poor that it no longer seeks to build up its liquid cash and safe collateral balances.

In such a situation the government, by trading its cash and its safe collateral liabilities for risky financial assets and four currently-produced goods and services both:

• creates more of what the private sector wants to hold, and so reduces or eliminates the gap between current and desired holdings of liquid cash and safe collateral.

• lowers interest rates and so increases the value of the future relative to the present, providing a direct financial incentive both to spend now on the creation of long-duration real assets and to spend now out of what are now more valuable anticipations of future income.

The first-order effects are on aggregate demand–are on resolving the disequilibrium excess demand for liquid cash and safe collateral that creates the gap between planned spending and expected income. The effects on financial stability are second-order. They are:

• On the one hand, higher asset valuations and higher levels of production and income greatly reduce the risks associated with financial assets backed by real wealth of one form or another.

• On the other hand, the tilting of the intertemporal relative price structure greatly increases the incentive to create long-duration financial assets–which will inherently be speculative, and some of which will partake to some degree of the unhedged out-of-the-money put or even the Ponzi nature.

• Which of these effects will be larger? For small reductions in interest rates, the first-order effect on the value of existing collateral assets in making finance safer will outweigh the second-order creation of new long-duration assets in making finance riskier.

• Which of these effects will be larger? To the extent that prudential regulation is effective–or even exists–the range over which reductions in interest rates will improve stability is larger.

• Which of these effects will be larger? To the extent that the economy is already flush with long-duration financial assets–which it is–the range over which reductions in interest rates will improve stability is larger.

The first-class study of this I know finds no evidence of the IMF’s contention that policies of ultra-low interest rates have laid the foundations for increased risks of systemic financial instability in the United States. Outside the United States? Yes, times of low interest rates in the core are times of opportunity–cheap financing is available to finance economic development–but also times of danger–are their financial markets robust enough to control and manage the hot-money fluctuations?–in the periphery. But how much weight does the argument that prudential policy in the periphery may go wrong have in militating against policies that–correctly–aim at appropriate internal balance in the core?

I am now more inclined to view worries that ultra-low interest rate and quantitative easing policies raise risks of future financial instability as the last-gasp argument of the austerians–as one more attempt to find an argument, any argument, to justify universal bankruptcy and the war on the Keynesian Mammon of Unrighteousness.

So should I rethink this?

In conversation, the wise young whippersnapper Gabriel Chodorow-Reich assigns me to the camp of the “institutions” view: that the danger is that systemically-important financial institutions become severely distressed; that conventional stimulative open-market operations give them more reserves to back loans; that stimulative quantitative easing takes duration risk off the private sector aggregate balance sheet; and neither of those obviously raises the risk that systemically-important financial institutions become severely distressed–rather the reverse, because without truly perverse demand curves systemically-important financial institutions should hold some of those increased reserves, and part with some of the assets with duration risk that quantitative easing takes off the table.

I agree with this characterization. As I see it, first-order risk is risk to the underlying, and the more QE, the less risky underlying the private-sector holds, and the more forward guidance, the larger the expected pool of reserve assets to keep financial institutions out of distress. Second-order risk is the risk not of a fall in underlying cash flows but of a big upward move in the market discount applied to risky cash flows–a sudden fall in the risk-tolerance of the market that overwhelms VAR limits. Why should QE that reduces the pool of risky assets and forward guidance that raises the expected pool of reserves raise the variance of risk-tolerance innovations. Third-order risk is when institutions reaching for yield have demand curves that slope the wrong way–the lower the spread, the more risky assets they hold. But this seems to require that QE and extended guidance have triggered an enormous wave of risky-asset issue if institutions are going to end with riskier portfolios.

But, he points out, there is also a “spreads” view, which as I interpret it seems to be:

• Long-term risky interest rates mean revert to normal.
• Stimulative monetary policy–present and expected future–lowers long-term risky interest rates.
• Quantitative easing lowers long-term risky interest rates too.
• Thus when long-term risky interest rates revert to their normal, they must undertake a larger jump.
• And that larger jump upon normalization causes greater losses and so creates more of a risk of severe financial distress.

And on this I have three thoughts:

I. It is not obvious to me what this “normal” that interest rates mean-revert to in the long run is. Looking at the nominal:

and at the real, with assumed adaptive inflation expectations:

perhaps you could argue for a 2.5%/year real Treasury 10-Year rate “normal” in the 1960s, and perhaps you could argue for a 3.75%/year real Treasury 10-Year rate “normal” from 1985-2000. But since 2000? Before 1980? And it is not at all obvious that the magnitude of the increase in long-term interest rates–nominal or real–in a business cycle recovery bears any relationship at all to the deviation from whatever you had previously thought of as “normal”.

The underlying argument really does seem to be: “expansionary policy, extended guidance, and quantitative easing have pushed long-term interest rates down below normal, and they are coming back to normal, and when they do come back they will come back one basis point for each basis point the Fed artificially pushed them down, and it will be bad.” The assumption seems to be either the policies are completely unwound–either by the Federal Reserve or by the market in some way–so that the Federal Reserve actions have no long-term permanent effect on the intertemporal price and risk structure and no medium-term transition-path effect on the speed of return to whatever the new normal turns out to be.

And I continue to find it impossible to put this argument into any kind of asset market demand and supply framework. And that makes me gravely suspicious.

There have been a number of arguments made in macroeconomics since 2006 that have been correct. There have been a number of arguments made in macroeconomics since 2006 that have been wrong but not implausible. And there have been a number of arguments–expansionary austerity; the 90% of annual GDP debt-limit cliff; quantitative easing necessarily and rapidly leading to debasement, de-anchoring of inflation expectations, and eventually hyperinflation, the zero fiscal multiplier–that seemed to me to be neither correct nor plausible but wrong but simply to lack any empirical or theoretical support whatsoever and to be the product of people who simply:

• had not done their homework,
• were grasping at straws for any argument that would support a previously-arrived at knee-jerk policy preference, and
• had very low intellectual standards.

The question is: what keeps the argument that quantitative easing and extended forward guidance are greatly increasing the risks of financial instability from falling into this third category? I am waiting for an answer. And I am not finding one.

In short, I am demanding that those who see quick unwinding of balance sheets and quick raising of interest rates as policies that would reduce rather than increase the risks of financial distress open up their black box and at least make an argument about what lies inside.

The stakes are large indeed. Let me turn over the microphone to the very smart Joe Gagnon:

Joe Gagnon: Yellen vs. the BIS: Whose Thesis Makes Better Sense?: “Janet Yellen is right to resist diverting monetary policy…

…from its primary objective of stabilizing economic activity and inflation: Everyone agrees that it is essential to fix the flaws in financial regulation and supervision… Governments need… to place limits on leverage and… raise capital standards. [But] setting monetary policy on any basis other than the stabilization of employment and inflation is more likely to harm financial stability than to help…. Even if it were clear that loose monetary policy feeds asset bubbles (and my colleague Adam Posen has argued convincingly that it is not), it does not follow that tighter monetary policy is necessarily the right response to a bubble. The damage caused by a bursting bubble arises from the deadweight costs of bankruptcy and the panic engendered…. The solution is to reduce debt and increase equity… and to ensure that systemically-important financial institutions are well capitalized.

During the housing bubble, restrictions on leverage needed to be tightened…. [But] to prevent the economy from falling into recession, the Fed would have needed to lower interest rates, not raise them, in order to encourage firms and households with healthy balance sheets to spend more. BIS economists point to historically low interest rates as a sign that policy is dangerously loose. However, there are many reasons why returns on safe instruments should be low or even negative now in real terms…. When the equilibrium required return on assets is at a historical low, then asset prices of necessity will be historically high. This does not imply that we are experiencing a risky bubble. Sweden recently provided a clear test of the dangers of diverting monetary policy from its primary function to fight a perceived bubble…. Its policy tightening may have been counterproductive even in terms of its original financial-stability motivation.

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Must- and Shall-Reads:

• Paul Krugman: In Defense of Obama
• Mario Draghi: Germany Should Start Spending More

 

1. Gavyn Davies: Germany Is Stalling: “Extremely weak German industrial production figures… for August have come an awkward time for the German government…. The official German line heading into these meetings is that the recovery is proceeding well, both in Germany and in the euro area as a whole, implying that the recent marked weakening in both GDP and inflation data is just a temporary aberration. There is no sign that the Merkel administration is ready to change its longstanding formula for economic success in the euro area: member states should stick to the fiscal targets in the Stability and Growth Pact, and should accelerate structural reforms, so that the expansionary monetary stance provided by the ECB can bear fruit…. This could change, however, if the German economy itself continues to weaken significantly. But how likely is this to happen?… The Fulcrum ‘nowcast’ models… activity growth rate has slowed from about 2.6 per cent in late 2013 to 0.9 per cent now…. It has not fallen yet into negative territory on an underlying basis, but it is certainly not acting as a powerful locomotive for the European economy. Far from it…. The Q2 official GDP growth rate of -0.6 per cent was already worse than had been expected…. The central estimate of the latest ‘nowcast’ for Q3 is that the GDP growth rate will rebound to 1.4 per cent annualised… about a 28 per cent probability [of a second negative number].”

2. Martin Wolf: An Extraordinary State of ‘Managed Depression’: “In the US, UK and the eurozone, output has fallen far below what virtually everybody expected eight years ago. The same is true of Japan, though the trend in question ended two and a half decades ago. Yet, contrary to what we might also have expected, we do not observe accelerating deflation…. When we look at the high-income economies in this way, we must recognise that they are in a truly extraordinary state. The best way to describe it is as a managed depression: aggressive monetary policies have been sufficient to halt accelerating deflation, but they have been insufficient to produce a strong expansion. This is particularly true of the eurozone…. Recent suggestions by the ECB’s president, Mario Draghi, that the eurozone needs a radical shift in policy regime, is the self-evident truth. Yet the powers that be in the eurozone–notably, the German government–plan to do nothing about it…. We can, at last, see some reasons for optimism about the US and UK… though confidence… cannot be strong. More radical alternatives, such as higher inflation targets and debt restructuring, may yet be needed. In the eurozone and Japan, however, the picture looks more uncertain…”

3. Super-Typhoon Vongfang:

4. Heather Boushey, Nancy Birdsall, Jose Antonio Ocampo, Alonso Segura, Laura Tyson, and Justin Wolfers: Challenges of Job-Rich and Inclusive Growth: Sharing the fruits of growth: “Rising income inequality across economies is a significant concern, not least because countries with higher inequality tend to have growth that is lower and also less durable. This panel discusses how to promote growth that is more equally shared…”

5. Dean Baker: Great Mystery at the Washington Post, Why are People Without Jobs Unhappy About the Economy?: “Steven Mufson uses a wonkblog piece to speculate on why it is that even though we have been in a recovery for more than five years people are still not happy about the economy. He tells us that President Obama has the same problem as President Bush (I), who got trashed on the economy even though revised data show it had been growing rapidly at the start of 1992. While Mufson seeks out expert analysis to try to resolve this paradox, he might try looking at the data for a moment. No one sees the economy. They don’t what the rate of growth is unless they read about it in the newspaper. What they do know is whether they have a job, whether their job is secure, and their pay is rising. If you ask about these questions the only mystery is why Mufson is wasting our time. In 1992 the employment to population ratio was still 1.5 percentage points below its pre-recession level. That would translate into roughly 3.2 million fewer people having jobs in today’s labor market. The current employment to population ratio is down by close to 4.0 percentage points from pre-recession levels, translating into more than 9.0 million fewer people with jobs. (Some of this is due to retirement of baby boomers.) Wages for most workers have been stagnant or declining in the last five years as was the case in 1992. So the real question here is why any serious people would have any question about why the public is sour on the economy. People care about their living standards and security.”

Should Be Aware of:

• Marcus Tullius Cicero Marci filius Marci nepos Cornelia tribu: In Catilinam Prima
• Ryan Cooper: What we can learn from Abraham Lincoln’s greatest mistake
• Gavyn Davies: It’s Draghi versus Weidmann on ECB QE

If Jeff Bezo would simply plug all of his Washington Post reporters into the St. Louis Fed’s FRED, we would have a much better world:

But we have the world we have, and Dean Baker tries to make it better:

Dean Baker: Great Mystery at the Washington Post, Why are People Without Jobs Unhappy About the Economy?: “Steven Mufson uses a wonkblog piece…

…to speculate on why it is that even though we have been in a recovery for more than five years people are still not happy about the economy. He tells us that President Obama has the same problem as President Bush (I), who got trashed on the economy even though revised data show it had been growing rapidly at the start of 1992. While Mufson seeks out expert analysis to try to resolve this paradox, he might try looking at the data for a moment. No one sees the economy. They don’t what the rate of growth is unless they read about it in the newspaper. What they do know is whether they have a job, whether their job is secure, and their pay is rising. If you ask about these questions the only mystery is why Mufson is wasting our time. In 1992 the employment to population ratio was still 1.5 percentage points below its pre-recession level. That would translate into roughly 3.2 million fewer people having jobs in today’s labor market. The current employment to population ratio is down by close to 4.0 percentage points from pre-recession levels, translating into more than 9.0 million fewer people with jobs. (Some of this is due to retirement of baby boomers.) Wages for most workers have been stagnant or declining in the last five years as was the case in 1992. So the real question here is why any serious people would have any question about why the public is sour on the economy. People care about their living standards and security.

Gavyn Davies: Germany Is Stalling: “Extremely weak German industrial production figures…

…for August have come an awkward time for the German government…. The official German line heading into these meetings is that the recovery is proceeding well, both in Germany and in the euro area as a whole, implying that the recent marked weakening in both GDP and inflation data is just a temporary aberration. There is no sign that the Merkel administration is ready to change its longstanding formula for economic success in the euro area: member states should stick to the fiscal targets in the Stability and Growth Pact, and should accelerate structural reforms, so that the expansionary monetary stance provided by the ECB can bear fruit…. This could change, however, if the German economy itself continues to weaken significantly. But how likely is this to happen?… The Fulcrum ‘nowcast’ models… activity growth rate has slowed from about 2.6 per cent in late 2013 to 0.9 per cent now…. It has not fallen yet into negative territory on an underlying basis, but it is certainly not acting as a powerful locomotive for the European economy. Far from it…. The Q2 official GDP growth rate of -0.6 per cent was already worse than had been expected…. The central estimate of the latest ‘nowcast’ for Q3 is that the GDP growth rate will rebound to 1.4 per cent annualised… about a 28 per cent probability [of a second negative number].”

Martin Wolf: An Extraordinary State of ‘Managed Depression’: “In the US, UK and the eurozone…

…output has fallen far below what virtually everybody expected eight years ago. The same is true of Japan, though the trend in question ended two and a half decades ago. Yet, contrary to what we might also have expected, we do not observe accelerating deflation…. When we look at the high-income economies in this way, we must recognise that they are in a truly extraordinary state. The best way to describe it is as a managed depression: aggressive monetary policies have been sufficient to halt accelerating deflation, but they have been insufficient to produce a strong expansion. This is particularly true of the eurozone…. Recent suggestions by the ECB’s president, Mario Draghi, that the eurozone needs a radical shift in policy regime, is the self-evident truth. Yet the powers that be in the eurozone–notably, the German government–plan to do nothing about it…. We can, at last, see some reasons for optimism about the US and UK… though confidence… cannot be strong. More radical alternatives, such as higher inflation targets and debt restructuring, may yet be needed. In the eurozone and Japan, however, the picture looks more uncertain…

“Uncertain” is not the way I would put it, I must say…

J. Bradford DeLong: Talking Points for IIF: Modern Capitalism: Growth and Inequality”: 4:00-4:50 pm, Friday October 10, 2014, Ronald Reagan Building

1. I am going to talk mostly about the U.S. and somewhat less about the North Atlantic, and say only one thing about the world as a whole.

2. The one thing about the world as a whole: After the Qingming Festival of 1976, the rulers of China recognized that they had lost whatever legitimacy they had ever possessed, that Hua Guofeng and his allies could not manage the situation, and that they needed to adopt the successful-mouse-catchers development strategy, the world has become a more equal place because China and secondarily India have done well. But a continuation is not guaranteed for the next two generations. It may not even be ore likely than not.

3. The United States primarily and the rest of the North Atlantic to a lesser degree are losing the race between technology and education. We do not need to slow technology; we do need to accelerate education if we are to ever reduce the gap between those at the 20th and 80th income percentiles to a magnitude that does not shame us.

4. We may not be able to do so with our current educational technologies: we know how to get 1/3 of our populations reaching adulthood a useful college education–but the same educational strategies may well be much less effective for those outside our luckiest 1/3.

5. A good deal of the rise in inequality outside of the 80-20 education-and-technology factor is also due to our technologies’ creation of winner-take-all contests within our economy. It is not clear to me why the economy of 1900 and the economy of 2000 did this, while the economy of 1960 did not.

6. The rest of the rise is due to a feedback loop by which the rich use their wealth to acquire more political influence to secure the rents that make them even richer so that they can use their wealth to an even greater extent to acquire still more political influence to secure even more rents. We do stand in great danger of building a latifundista society, which will in due course bring with it our Perons, our Pinochets…

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Martin Wolf, J. Bradford DeLong, Muhamed El-Erian, Jason Furman.

Nick Bunker picks up the slack left when Reuters pulled the plug on its noble and very useful Counterparties:

Nick Bunker: Where is the wage growth?: “The lack of wage growth is on everyone’s mind…

…Catherine Rampell at The Washington Post considers a variety of reasons for this slow wage growth… but finds one more convincing… a considerable amount of slack in the labor market…. Justin Wolfers presents a related puzzle… at the historical relationship between the unemployment rate and average wage growth…. Jared Bernstein looks at the relationship between wage growth and… [a] labor market slack [measure] developed by… Andrew Levin… [and] finds that the… relationship between slack and wage growth has weakened…. Tim Duy… thinks that Wolfers’s puzzle… isn’t all that puzzling…. The meager wage growth of recent years is just a continuation of a long-term trend highlighted by The New York Times’ David Leonhardt…

Also worth putting on your must-read view is the Bruegel weekly Blogs Review by Jeremie Cohen-Setton…

I remember Robert Solow saying 35 years ago that the assumption that business cycles were stationary symmetric fluctuations around a trend that to first-order evolved independently of the cycle was analytically very convenient but was also quite possibly completely wrong, and that a good economist with know when it was time to throw that assumption overboard.

Looking at nominal wage growth since 1985:

And looking at the difference between nominal wage growth and the core CPI since 1985:

allows you to see the stakes at issue here: was there something going on on the supply-side that made 1997-2010 the only time period of positive real wage growth since the Carter administration?

Or does the positive real-wage growth arise because Greenspan after the 1992 and 2003 unemployment-rate peaks is interested in producing a high-pressure economy and in doing whatever it takes in a way that Volcker and Bernanke/Yellen have not been? How much do social conventions of what real wages ought to be shape labor-market supply and demand in the medium- and the long-run, and how much do episodes of labor-market depression and labor-market boom shape those social conventions of what real wages ought to be?

You think that, having been in this business for 35 years, I would know–or at least have strong opinions that I regard as evidence-based…

Must- and Shall-Reads:

• Ngozi Okonjo-Iweala: Nigeria shows that Ebola is not unstoppable
• Matt O’Brien: Austerity has been an even bigger disaster than we thought
• Brian Blackstone and Hans Bentzien: Bundesbank’s Weidmann Criticizes ECB’s Stimulus Measures
• Peter Piot: ‘In 1976 I discovered Ebola–now I fear an unimaginable tragedy’
• Jared Bernstein: It’s Not a Skills Gap That’s Holding Wages Down: It’s the Weak Economy, Among Other Things
• William Langewiesche: Should Airplanes Be Flying Themselves?
• • John G. Fernald, Eric Hsu, and Mark M. Spiegel: Has China’s Economy Become More “Standard”?
• Jesse Rothstein: Revisiting the Impacts of Teachers

 

1. Brian Blackstone and Hans Bentzien: Bundesbank’s Weidmann Criticizes ECB’s Stimulus Measures: “German Bundesbank President Jens Weidmann criticized the European Central Bank’s decision to buy private-sector bonds and signaled his fierce opposition to purchasing government bonds, underscoring his reluctance to back additional stimulus measures to combat weakness in the eurozone economy. Mr. Weidmann said he stands by the conservative principles that have characterized the Bundesbank throughout its nearly 60-year history: keeping inflation low; protecting the central bank’s balance sheet from risks and strict separation from the financial needs of governments…. Mr. Weidmann said he is aware of the risks of too-low inflation…. However, ‘the trough of inflation should soon be behind us’, Mr. Weidmann said…. He was similarly skeptical of fiscal stimulus, despite low government borrowing costs…. ‘The cyclical situation and outlook do not require fiscal stimulus’ in Germany, he said…. ‘The concept of an independent central bank clearly focused on price stability is neither old-fashioned nor outdated’, he said. ‘It is about not falling into the trap of “This time is different”‘.”

2. Peter Piot: ‘In 1976 I discovered Ebola–now I fear an unimaginable tragedy’: “I still remember exactly. One day in September, a pilot from Sabena Airlines brought us a shiny blue Thermos and a letter from a doctor in Kinshasa in what was then Zaire. In the Thermos, he wrote, there was a blood sample from a Belgian nun who had recently fallen ill from a mysterious sickness in Yambuku, a remote village in the northern part of the country. He asked us to test the sample for yellow fever. We had no idea how dangerous the virus was. And there were no high-security labs in Belgium. We just wore our white lab coats and protective gloves. When we opened the Thermos, the ice inside had largely melted and one of the vials had broken. Blood and glass shards were floating in the ice water. We fished the other, intact, test tube out of the slop and began examining the blood for pathogens, using the methods that were standard at the time…”

3. Martin Wolf: We are trapped in a cycle of credit booms: “The eurozone seems to be waiting for the Godot of global demand to float it off into debt sustainability…. China is struggling with the debt it built up…. Without an unsustainable credit boom somewhere, the world economy seems incapable of generating growth in demand sufficient to absorb potential supply…. Financial sectors have deleveraged in the US and UK… so, too, have households…. Meanwhile, public debt has risen sharply…. Since 2007 the ratio of total debt, excluding the financial sector, has jumped by 72 percentage points in China, to 220 per cent of GDP…. Credit cycles matter because they frequently prove so damaging…. [Maybe] the pre-crisis trend was unsustainable… the damage to confidence… the debt overhang…. Mass bankruptcy, as in the 1930s, is devastating. But working out of debt is likely to generate a vicious circle from high debt to low growth and back to even higher debt…. Managing the post-crisis predicament requires a combination of prompt recognition of losses, recapitalisation of the banking sector and strongly supportive fiscal and monetary policies… use both blades of the scissors: direct debt reduction and recapitalisation on the one hand and strong economic growth on the other…. Yet the biggest lesson of these crises is not to let debt run ahead of the long-term capacity of an economy to support it in the first place. The hope is that macroprudential policy will achieve this outcome. Well, one can always hope…

4. William Langewiesche: Should Airplanes Be Flying Themselves?: “The Human Factor: Airline pilots were once the heroes of the skies. Today, in the quest for safety, airplanes are meant to largely fly themselves. Which is why the 2009 crash of Air France Flight 447, which killed 228 people, remains so perplexing and significant. William Langewiesche explores how a series of small errors turned a state-of-the-art cockpit into a death trap.”

Should Be Aware of:

• Jeff Spross: America’s Biggest Solar Provider Has A New Way To Make Rooftop Systems More Affordable
• Anne McCants: The Economic History of Work and Family | Additional Materials | Medieval Economic History in Comparative Perspective
• Matt O’Brien: Austerity has been an even bigger disaster than we thought
• Randall Munroe: xkcd: What If?

 

1. Steven Levy: Why I Started Backchannel: “I think… the secret is… not going away. That’s been my somewhat accidental strategy to making a mark as a technology writer…. This broad world of tech writing is crowded and confusing. Much of it is redundant…. Millions of readers are lured by sensational headlines, only to be disappointed to find a superficial dispatch with no new information, dashed off by a harried journalist tasked with producing three stories a day… wonderful, well-researched and written stories… [are] all too often… buried by the flotsam…. That’s why I am starting Backchannel…. We won’t even try to cover everything…. If there’s nothing original to say, we’ll keep quiet…”

2. Richard Mayhew: Who doesn’t like higher wages?: “Sally Pipes at Forbes is spewing fear, uncertainty and doubt at Forbes magazine on Obamacare again.  Her ‘argument’ this time is that Obamacare is bad for wage earners and she commits the usual sins of trusting Avik Roy and his ilk to be good faith brokers…”

3. Paul Krugman: The Long Cryptocon: “Bitcoin prices are down by two-thirds from their peak, and Izabella Kaminska, who has stayed with the subject, finds the sad story of a gullible rube who appears to have impoverished himself by believing in the hype. She comments: ‘Some extremely wealthy libertarians have a lot to answer for if these sorts of ppl lose all due to believing in them’. But this is nothing new. Back in 2012 Rick Perlstein published an eye-opening piece titled The Long Con, in which he documented the close association that has always existed between right-wing organizing and direct-mail commercial scams–in fact, it’s pretty much impossible to tell where one ends and the other begins. Send us money to keep Obama from imposing Sharia law; invest in this sure-fire scheme to profit from the coming hyperinflation. Was Glenn Beck selling paranoid politics or Goldline? Yes. Bitcoin… solve[s] an interesting information problem…. But the psychology and sociology of the phenomenon are the same old same old.”

4. Paul Krugman: The Deficit Is Down, and Nobody Knows or Cares: “The CBO tells us that the federal deficit is way down — under 3 percent of GDP. And Jared Bernstein notes that Obama seems to get no credit. You may ask, what did you expect? But the truth is that a few years ago many pundits claimed that Obama would reap big political rewards by being the grownup, the responsible guy who Did What Had To Be Done. Worse, some reports said that the White House political staff believed this. It was, of course, nonsense on multiple levels. While pundits may like to script out elaborate psychodramas about voter perceptions, real perceptions bear no relationship to their scripts — in fact, a majority think the deficit has gone up on Obama’s watch, while only a small minority know that it’s down. And the deficit scolds themselves are unappeasable — nothing that doesn’t involve severely damage Social Security and/or Medicare will satisfy them. Why, it’s almost as if shredding the safety net, not reducing the deficit, was their real goal. Deficit obsession has been immensely destructive as an economic matter. But it has also involved major political malpractice.”

Martin Wolf: We are trapped in a cycle of credit booms: “The eurozone seems to be waiting for the Godot of global demand…

…to float it off into debt sustainability…. China is struggling with the debt it built up…. Without an unsustainable credit boom somewhere, the world economy seems incapable of generating growth in demand sufficient to absorb potential supply…. Financial sectors have deleveraged in the US and UK… so, too, have households…. Meanwhile, public debt has risen sharply…. Since 2007 the ratio of total debt, excluding the financial sector, has jumped by 72 percentage points in China, to 220 per cent of GDP…. Credit cycles matter because they frequently prove so damaging…. [Maybe] the pre-crisis trend was unsustainable… the damage to confidence… the debt overhang…. Mass bankruptcy, as in the 1930s, is devastating. But working out of debt is likely to generate a vicious circle from high debt to low growth and back to even higher debt…. Managing the post-crisis predicament requires a combination of prompt recognition of losses, recapitalisation of the banking sector and strongly supportive fiscal and monetary policies… use both blades of the scissors: direct debt reduction and recapitalisation on the one hand and strong economic growth on the other…. Yet the biggest lesson of these crises is not to let debt run ahead of the long-term capacity of an economy to support it in the first place. The hope is that macroprudential policy will achieve this outcome. Well, one can always hope…