Friday, November 28, 2014

Some Interesting Items on the Web (November 28, 2014)

Financial Regulation and Related Matters:
“Secret Tapes Hint at Turmoil in New York Fed Team Monitoring JPMorgan.” Jake Bernstein of ProPublica.

“The Fed Needs Governors Who Aren’t Wall Street Insiders: With two vacancies to fill, Obama should pick nominees who will look out for Main Street, not the big banks.” Wall Street Journal op-ed by Senators Elizabeth Warren and Joe Manchin.

“George Painter, administrative law judge who criticized his own agency, dies at 87.” This is an article about a former CFTC administrative law judge who recently died. The CFTC had some serious problems with its ALJs in 2010. See my October 2010 posts about this.
“After Criticism, Fed Will Study Wall St. Oversight.” New York Times article.

“Enough Is Enough: The President's Latest Wall Street Nominee.” Senator Elizabeth Warren explains why she opposes the nomination of Antonio Weiss to be Under Secretary of the Treasury for Domestic Finance.
“Senator Elizabeth Warren’s Misplaced Rage at Obama’s Treasury Nominee.” Andrew Ross Sorkin of The New York Times doesn’t think much of Senator Warren’s opposition of Antonio Weiss. While having no opinion about Mr. Weiss, I don’t think much of Sorkin’s article. I do, though, agree with Sorkin that having worked for an investment bank should not be an immediate disqualification for the Treasury position. Mr. Weiss seems to be caught in the crossfire of a fight among Democrats as this New York Times article indicates: “Liberal Treasury Nominee’s Wall St. Prowess May Be a Vulnerability.” A blog post at the Center for Economic and Policy Research also criticizes Sorkin’s article – “It Would Take a Lot of Mismanagement to Raise the Cost of Treasury Debt by ‘Just’ 20 Basis Points.”

The Affordable Care Act:
“The Policy at the Heart of the Jonathan Gruber Controversy.” Neil Irwin of The New York Times.

“‘Grubergate’ Is Giving the Supreme Court Cover to Destroy Obamacare.” Brian Beutler of The New Republic.

“Obamacare’s biggest obstacle now may be its public image.” Catherine Rampell of The Washington Post.

“What Jon Gruber's Quotes Really Tell Us About Obamacare—and American Politics.” Jonathan Cohn of The New Republic.


“An Imperial President? Hardly. The smarter Republican response is to pass their own legislation, not howl in protest.” Jacob Weisberg of Slate.

“The GOP Reaction to Obama's Immigration Order Will Be Way More Damaging Than They Realize.” Noam Scheiber of The New Republic.

“Suffer Little Children.” Paul Krugman column on immigration in The New York Times.
CIA and NSA:

“Mark Udall to consider all options to reveal CIA torture report.” Denver Post article.

“Senate Torture Report Talks Break Down As Administration Pushes For Redactions.” Ryan Grimm and Ali Watkins of The Huffington Post.


“What Ferguson Means: The View From Abroad.” Huffington Post article.

“The law may have spoken but the Ferguson verdict is not justice.” Gary Younge writing for The Guardian: “The trouble is that the United States, for far longer than it has been a ‘nation of laws’, has been a nation of injustice. And in the absence of basic justice such laws can amount to little more than codified tyranny. When a white cop, Darren Wilson, shoots an unarmed black teenager, Michael Brown, dead and then is not indicted, the contradiction is glaring. For a world where it is not only legal for people to shoot you dead while you walk down the street, but where they can do so in the name of the law, is one in which some feel they have nothing to lose. And, in the words of James Baldwin: ‘There is nothing so dangerous as a man who has nothing to lose. You do not need 10 men. Only one will do.’”
“It’s Incredibly Rare For A Grand Jury To Do What Ferguson’s Just Did.” Ben Casselman of FveThirtyEight.

“How Not to Use a Grand Jury.” Jeffrey Toobin writing for The New Yorker.

“Chronicle of a Riot Foretold.” Jelani Cobb writing for The New Yorker.

“Ferguson: An American Dilemma.” John Cassidy of The New Yorker.
“America's Budding Police State.” Clive Crook writing for Bloomberg View.


“Behind the G.O.P.’s Misleading Shutdown Statements.” David Firestone of The New York Times.
“You’re Wrong, You’re Wrong, You’re Definitely Wrong, and I’m Probably Wrong, Too: What it was like to edit The New Republic at its most contentious.” Hendrik Hertzberg writing for The New Republic.

“Argentina’s Case Has No Victors, Many Losers.” Floyd Norris of The New York Times.

“United States: U.S. District Court Finds Transfers of Secured Debt by MERS Subject to Pennsylvania Recording Requirements.” Brian J. Levin article at the Mondaq website. Legal issues involving MERS and the separation of a mortgage from a promissory note continue to be considered by the courts.

“Wait! The right wants a new CBO director after all.” Lori Montgomery of The Washington Post.

“Keynes Is Slowly Winning.” Paul Krugman blog post.

“Counting Benghazi Blessings.” Gail Collins of The New York Times.
“Get Real, Boris Johnson!” Roger Cohen of The New York Times on the IRS problems of the mayor of London.

“Judge on the Spot.” Linda Greenhouse writing for The New York Times.

Tuesday, November 25, 2014

Andrew Ross Sorkin Opines on Elizabeth Warren and Antonio Weiss

In this morning’s New York Times, Andrew Ross Sorkin in his Dealbook column attacks Elizabeth Warren rather viciously for her opposition to President Obama’s nomination of Antonio Weiss for the position of Under Secretary of the Treasury for Domestic Finance (“Senator Elizabeth Warren’s Misplaced Rage at Obama’s Treasury Nominee”). The article is intemperate enough to make one wonder what it is doing on the New York Times’ news pages rather than in its opinion section because it is more advocacy than analysis.
I hasten to say that I have no opinion about whether Antonio Weiss would be a good Treasury Under Secretary having only been aware of him since his nomination was announced. Also, I agree with Mr. Sorkin that having worked for a financial firm should not operate as an immediate disqualification for this Treasury Under Secretary position. I do, though, take issue with the following paragraphs in Mr. Sorkin’s column:

“The role Mr. Weiss has been nominated for is largely responsible for managing the country’s $12.9 trillion debt at a time when the Federal Reserve is ending its stimulus. The job requires deep experience in the capital markets and global relationships. This is not a job for a local lawyer or research group executive.
“To put this in context, according to Politico, if the interest on the securities the Treasury sells was just 20 basis points higher for a year because of uncertainty or mismanagement, it would cost taxpayers $32 billion — more than it would cost to fund the Consumer Financial Protection Bureau for 50 years. The bureau was, of course, inspired by Ms. Warren.”
Bringing up the Consumer Financial Protection Bureau in this context is, of course, a cheap rhetorical trick that says more about Mr. Sorkin than it does Senator Warren, but the real problem with this paragraph is that it makes Treasury debt management seem more difficult than it actually is. Essentially, in its debt management decisions, Treasury needs to be aware of any shortfall between revenues and expenditures, the timing mismatch between when revenues are received and payments need to be made, and the need to refinance maturing debt. This is not that difficult. Usually, Treasury adds or subtracts from its current pattern of security issuance given the short-term forecasts of its cash needs.

In my experience at Treasury, most debt management decisions are not that important unless they come as a surprise to the market. I remember as a new Domestic Finance employee in the early 1980s wondering how Treasury was going to finance the huge increase in deficits that took place at the beginning of President Reagan’s administration. They had jumped from about $50 billion a year to around $200 billion, which were big numbers at the time. My career boss, Frank Cavanaugh, had a simple answer, “more.” He was absolutely right. There were some political appointees at Treasury who wanted to change debt management practices significantly and others who disagreed with the first group; for the most part, Secretary Don Regan did not accept the recommendations for changes.
During the Clinton and George W. Bush administrations, there was a conscious policy to shorten the average maturity of the public debt. The Obama administration has reversed this and has been lengthening the average maturity. While I did not and do not agree with the previous shortening decision, I also do not think it was that significant except for the decision to discontinue issuing 30-year bonds during the Bush administration. The announcement of this decision came as a surprise to the market and was botched in its execution (the news embargo was broken by a consultant who informed a client firm and Treasury posted the information on the web before the embargo expired). The decision itself was wrong and was reversed after the Under Secretary who made the decision, Peter Fisher, left the Treasury. What this episode demonstrates is that Treasury should not try to be too clever and try to outwit the market. As a Treasury Assistant Secretary for Domestic Finance in the George H.W. Bush administration, David Mullins, remarked with respect to Treasury debt management, “it’s tough for an elephant to dance.”

With respect to Mr. Weiss, I would be more concerned about his views on financial market and financial institution regulation, given Treasury’s enhanced role in this area, and also whether he is the sort of person one can trust to deal with a financial market emergency, should that happen. I also would want to have some idea about his management skills and whether he seems to be someone who understands the differences between the public and private sectors and can make the transition without too many problems.  
As for Mr. Sorkin, he may be right that Senator Warren is wrong to oppose Mr. Weiss. The way he makes his argument, though, reinforces the suspicion, which has been prevalent for some time, that he has been at least partially captured by Wall Street ever since he wrote Too Big to Fail. One should listen to people from Wall Street because they know their business, but one should always keep in mind that their expressed views may be colored by their self-interest.

Saturday, November 15, 2014

Some Interesting Items on the Web (November 15, 2014)

The Affordable Care Act:
“The Real Villains of the Obamacare Cases Aren't the Judges—They're the Lawyers.” New Republic article by Yishai Schwartz.

“Delay sought on health care at appeals court.” Lyle Denniston writing for Scotusblog.
“Symposium: It’s way too soon for ACA opponents to celebrate.” Brianne Gorod writing for Scotusblog.

“State Obamacare Strategies Take Shape as Court Case Looms.” Article by Alex Wayne for Bloomberg Businessweek.

“This Philly-Based Investment Adviser Has Become Obamacare's Digital Menace.” Sam Stein article for The Huffington Post about the man who is finding the Jonathan Gruber videos.
“Eight Reasons to Stop Freaking Out About the Supreme Court's Next Obamacare Case.” Brian Beutler article in The New Republic.

“Will GOP Govs Really Rescue Obamacare?” Michael Tomasky is doubtful if the plaintiffs win at the Supreme Court. Article in The Daily Beast.
“Law in the Raw.” Linda Greenhouse article for The New York Times.

“Four Reasons the Supreme Court Is Likely to Rule Against the Obama Administration in Burwell.” John Yoo writing for National Review Online. Linda Greenhouse refers to this article.
“Did the Author of Obamacare Admit It’s Evil?”  Jonathan Chait of New York magazine.

“Will Obamacare separate Scalia from his principles?” E.J. Dionne writing for The Washington Post.

“The mess Jonathan Gruber created.” Steve Benen writing for the MSNBC website.
“The Jonathan Gruber Controversy and Washington’s Dirty Little Secret.” Neil Irwin of The New York Times.

“The Jon Gruber controversy and what it means for Obamacare, explained.” Sarah Kliff of Vox.

“The Truth About Gruber-Gate.” Kate Pickert writing for the Time magazine website.

“CFTC Turns Toward Administrative Judges.” Wall Street Journal article. In 2010, the CFTC had problems with its administrative law judges. I wrote about it here, here, and here.                                
“In Cuba, Misadventures in Regime Change.” New York Times editorial.

“UK High Court court wades into Argentina’s debt crisis.” Financial Times article.

“The Governing Trap.” Advice for the Republicans from the editors of the National Review.
 “Don’t govern on fantasies.” E.J. Dionne comments on the National Review editorial in his Washington Post column.

“Wobbling on Climate Change.” New York Times op-ed by Piers J. Sellers, the acting director of earth science at NASA’s Goddard Space Flight Center.
“The Worst Voter Turnout in 72 Years.” New York Times editorial.

“Who Will Run CBO Next?” Damian Paletta speculates for The Wall Street Journal.
“GOP Plan to Block Immigration Action Could End in Government Shutdown.” Margaret Hartmann of New York magazine.

“Mexico’s Bold Move on Debt Restructuring Contracts.” New York Times article.

“Tim Geithner: The 3 Words That Saved The Euro Were Ad-Libbed.” Article by Ben Walsh in The Huffington Post.
“Why the Republicans Won.” Elizabeth Drew writing for The New York Review of Books’ blog.

“Congress Extends Itself.” Gail Collins writing about Congress and tax legislation. She comments:
“The current Ways and Means chairman, Dave Camp, is a tragic figure who actually attempted to do tax reform with an ambitious proposal that eliminated some temporary taxes and made the rest permanent. It included a 4 percent reduction in the top tax rate, because no matter how hard Camp struggled, he could not honestly get it lower.
“He might just as well have proposed a bill declaring God dead. The committee never even voted on it. John Boehner made fun of it. Camp was the political version of Justin Bieber, without the parties.”

Some Comments on Recent Affordable Care Act Political Developments

I was a bit taken aback when I read E.J. Dionne's column in The Washington Post last Thursday morning. The normally temperate columnist concluded:
“Here’s a hypothetical for you: First, the Supreme Court issues a ruling that installs a conservative president. Then, he appoints two conservative Supreme Court justices who then join with three of their colleagues to make mincemeat of the greatest achievement of a progressive president elected by a clear majority. If such a thing happened in any other country, would we still call it a democratic republic?”
In the same vein, Linda Greenhouse concluded her article (“Law in the Raw”) written for The New York Times on King v. Burwell on a dispiriting note:

“So this case is rich in almost every possible dimension. Its arrival on the Supreme Court’s docket is also profoundly depressing. In decades of court-watching, I have struggled — sometimes it has seemed against all odds — to maintain the belief that the Supreme Court really is a court and not just a collection of politicians in robes. This past week, I’ve found myself struggling against the impulse to say two words: I surrender.”
Emotions are obviously running high on this subject. Opponents of the ACA are gleeful, thinking that they may have the ACA on the ropes, while supporters of the law are fearful of what might happen if the Supreme Court finds for the plaintiffs. As I have indicated, Republican opponents of the law are probably better off politically if they lose this case. That way they can complain about whichever justice or justices joins the four more liberal members of the Court while still contending that the ACA is a terrible statute and terrible public policy. If they win, Republicans in Congress and many Republican governors will have to deal with real-world consequences, including some very angry voters.

If King v. Burwell was not enough to keep Republican opponents of the ACA’s spirits up, there were some new Jonathan Gruber videos on which to comment while they conveniently ignored that both parties play games in order to get the CBO to score the fiscal impact of legislation in a way that enables it to be passed.
Gruber was, of course, not careful in what he said. Calling voters “stupid” in a public forum is not smart. Congressional committees may now hold hearings on what Gruber said, but this is for show – in fact, it is a sideshow. Rather than getting on their high horse and criticizing Democrats for dishonesty and lack of transparency, serious Republican policy wonks would better spend their time in coming up with ways to reduce U.S. medical costs to levels approaching what other industrial countries pay while providing universal healthcare to their citizens and achieving better public health results. Harping on Gruber is not serious.

As a final point, while the ACA will at some point be amended and, hopefully, improved, the goal of providing universal, or near-universal, affordable healthcare is not going away, no matter how successful the Republicans have been at bad-mouthing “Obamacare.” Republicans need to accept that. They might usefully remember that, while admittedly, the United Kingdom is a very different country than the U.S., Prime Minister Clement Attlee, whose government, among other initiatives, created the National Health Service after World War II, is considered to be among the greatest Prime Ministers of the 20th century.
“The arc of the moral universe is long, but it bends towards justice.” (Theodore Parker, Martin Luther King, and others.)

Sunday, November 9, 2014

Some Interesting Items on the Web (November 9, 2014)

“Obama Is a Republican: He’s the heir to Richard Nixon, not Saul Alinsky.” Bruce Bartlett writing for The American Conservative.

“The Bushes, Led by W., Rally to Make Jeb ‘45’.” Peter Baker article in The New York Times.
“Capitol Book Club, With a Bonus.” New York Times article.

“The Democrats’ Catastrophe and the Need For a New Agenda.” Harold Meyerson writing for The American Prospect.
“Congratulations, Voters. You Just Made This Climate Denier the Most Powerful Senator on the Environment.” New Republic article by Rebecca Leber.

“Dark Money Helped Win the Senate.” New York Times editorial
Economic Policy:

“The Mortgage Industry Is Strangling the Housing Market and Blaming the Government.” David Dayen writing for The New Republic.

“The Power Behind the Throne at the Federal Reserve.” Article by Jesse Eisinger about Scott Alvarez in The New York Times.

“Mario Draghi's German problem.” Reuters.

“The Conflict Between Germany and the E.C.B. That Threatens Europe.” Neil Irwin writing for The Upshot of The New York Times.
“Notes on Easy Money and Inequality.” Paul Krugman.

“Banks Again Avoid Having Any Skin in the Game.” Floyd Norris of The New York Times.
“Ideology and Investment.” Paul Krugman column.

“Blaming Easy Money for Alien Invasions.” Noah Smith writing for Bloomberg View.

“John Maynard Keynes Is the Economist the World Needs Now.” Bloomberg Businessweek article by Peter Coy.
The Affordable Care Act:

“States Benefiting Most From Obama’s Health Law Elected Republicans.” Margot Sanger-Katz of The New York Times.

“Afternoon Must-Read: Nicholas Bagley: The Supreme Court Will Hear King. That’s Bad News for the ACA.” Brad DeLong opines.

“The New Affordable Care Act Supreme Court Case: King v. Burwell.” I opine.

“Symposium: The grant in King – Obamacare subsidies as textualism’s big test.” Interesting article by Yale law professor Abbe Gluck. He argues that using Justic Scalia’s interpretive methods, the plaintiffs in the King case lose.
“What’s at Stake in Supreme Court’s Latest Health Care Case.” Margot Sanger-Katz of The New York Times.

Argentina Debt:

“The Hot New Threat To Argentina — ‘Acceleration’.” Linette Lopez writing for Business Insider.
“A New Twist in the Argentine Debt Saga.” Bloomberg Businessweek article by Sheelah Kolhatkar.

“Hedge Fund’s Move Risks Prolonging Argentina Bond Default.” Bloomberg Businessweek article by Katia Porzecanski and Camila Russo.
“Singer Seeks Order to Keep Argentine Lawyer in U.S.” Bloomberg article.


“Cuba’s Impressive Role on Ebola.” New York Times editorial.
“Ebola’s Information Paradox.” New York Times op-ed by Steven Johnson.

“You're Overreacting to the Ebola Outbreak, and It's Not Helping.” New Republic article by Eric Sasson.

“U.S. and Cuba Come Together Over Ebola, Infuriating Republicans.” New York Times editorial page post by Ernesto Londoño.

“World Bank Workers Are Venting Their Frustrations in These Mysterious Flyers.” Article posted on Business Insider.

“In Cold War, U.S. Spy Agencies Used 1,000 Nazis.” New York Times article by Eric Lichtblau.

“Big Banks Brace for Penalties in Probes.” Wall Street Journal article.

“Prosecutors Suspect Repeat Offenses on Wall Street.” New York Times article.

“Approaching Brexit? Merkel Fears Britain Crossing a Red Line on Immigration.” Spiegel Online International article.

“Ireland’s IDA boss faces bizarre CNBC interview.” Irish Times article.        
“The $9 Billion Witness: Meet JPMorgan Chase's Worst Nightmare.” Matt Taibbi article in Rolling Stone.

“Doubting the Economic Data? Consider the Source.” Floyd Norris of The New York Times.

The New Affordable Care Act Supreme Court Case: King v. Burwell

The reaction to the Supreme Court’s decision on Friday to take the King v. Burwell case initially elicited cheers from opponents to the Affordable Care Act (“ACA”), mostly Republicans, and fear among supporters of the law, mainly Democrats. The ACA opponents apparently hope that, if they won this case, it would strike a near fatal blow to the ACA; the ACA supporters fear that the ACA opponents may be right.
On reflection, it became clear that this rather simplistic analysis was not correct. For example, Brad DeLong argued in a post on Friday that political realities if the petitioners prevailed would cause some Republican governors and legislators to fix the problem and cause problems for Republican politicians in states that have not agreed to the Medicaid expansion. The reason is that middle class people who have been benefitting from federal subsidies for the health insurance they bought on the federally-run exchange will be mighty upset if those subsidies were taken away. The backlash against the Republican Party could be severe.

By way of background, the King v. Burwell is one of two cases for which decisions at the appellate level were issued this past summer raising the issue of whether people residing in states which opted not to set up their own exchange and who purchase health insurance on the federal exchange are eligible for federal subsidies. In the other case, Halibig v. Burwell, a three-judge panel of the D.C. Circuit agreed with the plaintiffs that the ACA limited subsidies to those who bought health insurance on an exchange run by a state. A little afterwards on the same day as the Halibig decision was announced (July 22, 2014), a Fourth Circuit panel released their decision in King, which reached the opposite conclusion. Subsequently, the Administration asked the entire D.C. Circuit to rehear the Halibig case. Most often requests for en banc hearings are denied, but this one was accepted, thus vacating the initial Halibig decision. In consequence, as it stands, there is currently no split among the circuit courts. At the time that the D.C. Circuit accepted to rehear Halibig, it was widely expected that the panel’s decision would be reversed. Since now the same legal issue as in Halibig is now before the Supreme Court in King, the D.C. Circuit may wait for a decision in the King case before issuing one of its own.
These cases are now being litigated because some lawyers on the right some time ago thought they had found a major flaw in the ACA which they could use to bring it down. They were able to bring the King case because they found Virginia residents who objected to being forced to buy subsidized comprehensive health insurance or pay a penalty. The Fourth Circuit agreed that these individuals had standing to bring the suit. The Fourth Circuit decision explains:

“…Virginia has declined to establish a state-run Exchange and is therefore served by the prominent federally-facilitated Exchange known as Without the premium tax credits, the plaintiffs would be exempt from the individual mandate under the unaffordability exemption. With the credits, however, the reduced costs of the policies available to the plaintiffs subject them to the minimum coverage penalty. According to the plaintiffs, then, as a result of the IRS Rule, they will incur some financial cost because they will be forced either to purchase insurance or pay the individual mandate penalty.”
The plaintiffs’ argue that the plain language of the statute limits subsidies to people who bought insurance on a state exchange. (As an aside, no one disputes that “state” in this context includes the District of Columbia, which has set up an insurance exchange.) Others argue that the specific language in contention is ambiguous when examined in the context of the statute as a whole, and, moreover, it is not what Congress intended. According to Yale law professor Abbe R. Gluck, one does not need to divine Congress’s intent or examine the legislative history of the ACA to come to the conclusion that ACA does not permit federal subsidies on insurance bought on the federal exchange. He argues that interpreting the language of the ACA according to the interpretive methods of the most prominent advocate of “textualism,” Supreme Court Justice Antonin Scalia, leads to the conclusion that the plaintiffs’ arguments are wrong.

If the Supreme Court found in favor of the plaintiffs, there would be severe disruption and confusion in the healthcare insurance market in the 36 states that use the federal health insurance exchange. Given the number of people affected, as well as the insurance industry, the healthcare industry, and employers who do not provide health insurance to all or some of their employees, it seems likely that many state governments would quickly remedy the situation if the U.S. Congress did not do so first. The holdout states would be under immense pressure on the issue, as would Congress.
In a Q and A article in The New York Times, Robert Pear writes that “a legal victory for opponents of the law could be a political gift to Democrats. Republicans would have to explain why they wanted to deprive people of health insurance, and Democrats would have a powerful issue to mobilize support for the law and for their party.” I think this is correct. It does not appear that Republicans who are excited about this case have thought through the political implications if their side should win in the Supreme Court. My guess is that they will luck out and lose the case, but you never know.

Friday, October 17, 2014

Some Interesting Items on the Web (October 17, 2014)

Since I have not done this for a while, there are a lot of items, some of which I hope are of interest to readers of this blog.

“Errors and Emissions: Could Fighting Global Warming Be Cheap and Free?” Paul Krguman article in The New York Times.

“Florida Goes Down the Drain: The Politics of Climate Change.” Gail Collins of The New York Times.

“Climate Science Is Settled Enough: The Wall Street Journal’s fresh face of climate inaction.” Raymond T. Pierrehumbert writing for Slate.

“Are walrus at risk from climate change?” Karl Mathiesen writing for The Guardian.  
Economic Policy:

“Stuck on Inflation.”  Jeff Madrick writing for The New York Review of Books blog.

“Why inequality is such a drag on economies.” Martin Wolf of the Financial Times.
“How the Jobless Rate Underestimates the Economy’s Problems.” Jared Bernstein writing for The New York Times.

“Securing Social Security.” Gail Collins of The New York Times.
When Trade Treaties Pose a Sovereign Threat.” Jared Bernstein blog post.

“The trade clause that overrules governments.” Harold Meyerson writing for The Washington Post.
“Why Weren’t Alarm Bells Ringing?” Paul Krugman reviews a new book by Martin Wolf for The New York Review of Books.

“Labour must expose the fallacy of George Osborne’s ‘recovery’.” Robert Skidelsky writing for The Guardian.

“Secret Deficit Lovers.” Paul Krugman New York Times column.
“Dam breaks in Europe as deflation fears wash over ECB rhetoric.” Ambrose Evans-Pritchard of The Telegraph.

“Germany on defensive as criticism of economic course mounts.” Reuters article in The Globe and Mail. I attended some of the IMF events. There was an amazing consensus that most countries should spend more on infrastructure and that Germany, in particular, should do more to stimulate its economy. The Germans are resisting, though some think that the German slowdown along with international pressure may cause Angela Merkel's government to reconsider. In answer to a question about how to get Germany to arrive at a political consensus that its government needs to spend more, Larry Summers answered that he had enough trouble with American politics to get into advising about German politics. Then he went on to say that, if German Finance Minister Wolfgang Schaeuble, who was on the same panel, could manage to convince himself of the need to spend more, the finance minister could figure out how to accomplish this politically.

“Germany's Austerity Obsession Could Take Down the Global Economy.” Mark Gongloff writing for The Huffington Post.
“Fed’s Evans: Biggest Risk to U.S. Now is Premature Rate Hikes.” Article on The Wall Street Journal website. At an IMF event last week, Fed Vice Chair Stanley Fischer was asked for the definition of “a considerable time.” To my surprise, he answered with some specificity, saying that it was anywhere between 2 months and one year. However, Fischer said at this particular event and others (he appeared at many IMF events) that the decision would be dictated by the data. If the economy grows slower than the Fed expects, a rate rise would take place later. In other words, the Fed reserves the right to reevaluate its policies at any time in reaction to economic data. That is appropriate.

 “E.U. and France on Collision Course Over Budget.” New York Times article.

“Eurozone woes boost anti-austerity camp.” Article posted on the Deutsche Welle website.
“Summers, Schäuble go head to head on ailing Europe.” Video of and article on this IMF event at the CNBC website.

“Monetary policy: When will they learn?” Ryan Avent of The Economist.
“Economically, Germany is a threat to itself.” Harold Meyerson op-ed in The Washington Post. He writes:

“But I’m no fan of Germany’s macroeconomics, which are more destructive and dangerous than those of any other nation. By using its power as the dominant nation in the European Union to impose austerity on the struggling economies of Southern Europe, Germany has condemned young people in Spain and Greece to unemployment rates in excess of 50 percent, shaken the social fabric of every nation on the Mediterranean and contributed to the rise of such far-right parties as France’s National Front and Greece’s neo-Nazi Golden Dawn. Unlike other nations, Germany hasn’t offshored its best industrial jobs, but it has relentlessly offshored to its Southern neighbors conditions conducive to the rise of a xenophobic extremism that one would think Germany, of all nations, wouldn’t wish to nourish.”
“What Markets Will.” Paul Krugman column. He writes:

“I’m not mainly talking about plunging stock prices, although that’s surely telling us something (but as the late Paul Samuelson famously pointed out, stocks are not a reliable indicator of economic prospects: ‘Wall Street indexes predicted nine out of the last five recessions!’) Instead, I’m talking about interest rates, which are flashing warnings, not of fiscal crisis and inflation, but of depression and deflation.
“Most obviously, interest rates on long-term U.S. government debt — the rates that the usual suspects keep telling us will shoot up any day now unless we slash spending — have fallen sharply. This tells us that markets aren’t worried about default, but that they are worried about persistent economic weakness, which will keep the Fed from raising the short-term interest rates it controls…

“It’s also instructive to look at interest rates on ‘inflation-protected’ or ‘index’ bonds, which are telling us two things. First, markets are practically begging governments to borrow and spend, say on infrastructure; interest rates on index bonds are barely above zero, so that financing for roads, bridges, and sewers would be almost free. Second, the difference between interest rates on index and ordinary bonds tells us how much inflation the market expects, and it turns out that expected inflation has fallen sharply over the past few months, so that it’s now far below the Fed’s target. In effect, the market is saying that the Fed isn’t printing nearly enough money.”
Financial Regulation and Related Issues:

“The Secret Recordings of Carmen Segarra.” This American Life (audio).

“The Secret Goldman Sachs Tapes.” Michael Lewis writing for BloombergView.

“Finally, the Truth About the A.I.G. Bailout.” Noam Scheiber op-ed for The New York Times.

“A.I.G. Trial Witnesses Will Be Central Cast From 2008 Crisis.” New York Times article.

“The A.I.G. Trial is a Comedy.” John Cassidy of The New Yorker.
“Now as Provocateur, Summers Says Treasury Undermined Fed.” Binyamin Appelbaum of The New York Times. Also, see my comments on this.

“N.Y. Fed Lawyer Says AIG Got Billions Without Paperwork.” Bloomberg article.

“Hank Paulson’s Telling Admission.” John Cassidy of The New Yorker.


“Nobody Could Have Predicted, Bill Gross Edition.” Paul Krugman blog post.

“Depression Denial Syndrome.” Paul Krugman.

“Golden Rule: Why Beijing Is Buying.” Alan Greenspan writing for Foreign Affairs. Greenspan has long been attracted to the idea of returning to the gold standard. In fact, at the beginning of the Reagan Administration, he wrote a WSJ op-ed and submitted a comment to the government gold commission that the Treasury should issue gold-backed or linked debt securities. He not only made an unconvincing argument that this would save the government money but also made an argument that it would be the first step to a gold standard, which he favored. (I was tasked with reviewing the gold securities idea as a Treasury employee at the time.) He became quiet on this subject as Fed Chairman, though I remember reading once that he thought he might be the only person at the Fed who thought a gold standard would be a good idea.  
In this article is that Greenspan can't seem to limit it to China and gold. At the end of the article, he makes an unrelated comment about China's political system and the possible effects of that going forward. What he has to say about this is sensible, but there is no clear link between these comments and gold policy.

“After a Dreary Summer, Autumn Chill in France.” Mira Kamdar writing for The New York Times.
“In Defense of Obama.” Paul Krugman article for Rolling Stone.

“The Unhealthy Politics of Ebola.” Brendan Nyhan writing for The New York Times.
“The Nightmarish Politics of Ebola.” John Cassidy of The New Yorker.

“Calculating the Grim Economic Costs of Ebola Outbreak.” Andrew Ross Sorkin writing for The New York Times.

“No, budget cuts aren't the reason we don't have an Ebola vaccine.” Sarah Kliff writing for Vox. She writes:

“NIH funding definitely matters. “It’s fair to say that, without the budget cuts, we would be closer to a cure than we are right now,’ says Benjamin Corb at the American Society for Biochemistry and Molecular Biology. ‘We would have understood the virus and perhaps understood how to counteract the virus if we didn't have budget cuts.’
“But as Corb pointed out to me, there's a long space between being closer to a vaccine — and ‘probably’ having one (which is what [NIH director Francis] Collins claimed).”

“The Nightmarish Politics of Ebola, Part 2.” John Cassidy of The New Yorker.
“Here’s What to Say When You Don’t Know Why the Stock Market Fell.” Josh Barro writing for The New York Times.

Wednesday, October 8, 2014

Debt Management Discussion at Brookings with a Combative Larry Summers and Others

Many of the events I have attended at Brookings are sober, serious-minded affairs, and it helps to be really interested in the topic being discussed. On September 30, a discussion about debt management started off that way, but then Larry Summers got a chance to defend a policy proposal in the paper he wrote with others, “Government Debt Management at the Zero Lower Bound,” and the event became rather lively, interesting, thought-provoking, and entertaining. That is not to say that I agreed with everything that Summers said, and, combative as he was, he did admit that the discussants had given him and his coauthors issues to think about.
Despite the paper’s title, it really is a compendium of observations and analyses about debt management, some of which have no apparent link to the zero lower bound. For example, of particular interest to me because of work I did at Treasury, there is a discussion of the liquidity premium on Treasury Inflation-Protected Securities, but why this discussion is included in this paper is unclear.
The controversial issue that the paper addresses is the coordination of Treasury debt management policy with Federal Reserve open market operations. This, of course, is not just an issue when the Federal Reserve’s policies are constrained by the zero lower bound. For example, the paper makes reference to the 1961 Operation Twist policy of the U.S. government. This was an attempt to lower long-term rates and to increase short-term rates. The rationale was that short-term rates needed to be higher to protect the value of the dollar under the Bretton Woods system and long-term rates needed to be lower to encourage investment and stimulate the economy. The current paper states:
“Operation Twist is perhaps the best example of the potential for Fed and Treasury cooperation, because the circumstance was, much like the zero lower bound today, that the Fed was constrained in its use of the short rate as a policy instrument. However, unlike in the more recent period, during Operation Twist the Fed was able to complement its own actions with the secured cooperation of the Treasury to alter the maturity structure of new debt issuance.”
In fact, though the Fed and the Treasury were not cooperating, as the paper notes in footnote to its discussion of Operation Twist:

“Long-term interest rates fell on most dates in early 1962 when the initial information about Treasury and Fed policies was released. The only exception was when the Treasury surprised both the White House and the Fed by issuing longer-term bonds on March 15, 1961. This made James Tobin (then a member of Kennedy’s CEA) ‘furious.’ Treasury continued to extend its maturity thereafter and within a year the average maturity had increased by 3.5 months. Thus, Treasury began working at cross-purposes with the Fed, just in as [sic] the current episode.”  
In other words, Operation Twist is not informative about the supply effects of Treasury securities on the yield curve, nor is it an example of cooperation between the Treasury and the Fed. The authors need to revisit this issue if they revise the current paper.

The main contention of the paper is that the Treasury and the Federal Reserve are currently working at cross purposes. The Treasury is extending the maturity of the public debt by selling more long-term securities, while the Fed is taking long-term securities off the market through its open market operations. The authors believe that this selling and buying should stop. Moreover, the authors write that, even in more normal interest rate environments, “because of the importance of debt management for the functioning of financial markets and because of its relation to financial stability, the Federal Reserve should have a more significant advisory role than it does currently.”
Interestingly, the discussants argued that this recommendation could result in an erosion of Federal Reserve independence, though on its face, it would seem to give the Fed greater ability to influence the Treasury. In this connection, one should note that the authors believe that Treasury’s debt management policy is currently in error, not the Fed’s quantitative easing policies.

Nevertheless, I think the discussants are right to have this concern, though I would add that Treasury’s independence from the Fed is also a concern. The authors suggest that the Fed and the Treasury “annually release a joint statement for managing the U.S. government’s consolidated debt,” by which they mean debt held by the public not including the Federal Reserve Banks. One can only imagine the lengthy and likely unpleasant and stressful meetings at various levels as the Treasury and the Fed negotiate this statement.
Whose voice would be controlling would depend on circumstances and personalities. The Fed often has a strong hand in discussions about debt management, partly because they have more staff and other resources to draw upon than Treasury. But a strong-minded and strong-willed Secretary, think John Connally or William Simon, could conceivably bring strong pressure to bear on the Fed if there were a strong disagreement between the two institutions.

This brings me to a final comment about the paper. It reads as if the Treasury and the Fed make policy as independent actors without referencing who might be in charge of those institutions at any particular time. Political appointees to the Treasury and Federal Reserve governors and bank presidents make decisions. Sure, they receive input from staff and other sources, but ultimately they make decisions as individuals.
As way of example, with regard to debt management, the decision in 2001 to stop selling 30-year bonds was made by then Under Secretary Peter Fisher. The argument that various Treasury officials made at the time in support of this decision is that, since the yield curve usually has a positive slope, a shorter maturity structure would “over time” lead to lower cost financing. Of course, the time frame was left ambiguous, and the argument only worked, if it worked at all, if Treasury could maintain this policy over time. As it turns out, it could not. Thirty-year bond issuances resumed in the same administration as Peter Fisher served (George W. Bush) after he had left, though not immediately. The Obama Administration subsequently reversed course from the shortening strategies of both the Clinton and Bush Administrations and decided to lengthen the average maturity of the public debt. In other words, particular individuals do matter, independent of what one might model as in a particular institution’s interest.