Your Civics Lesson

I'm teaching intermediate macro-economics this semester. One thing that keeps coming up in this class is the generally low level of knowledge regarding the role and relationship of various actors in the government. This is not some screed about how "kids are so dumb these days", I know plenty of adults who are similarly uninformed about how things work. So here is a quick primer for you:

High Snark

Bill Easterly is an economist whose work I enjoy, and who is fantastically derisive with regards to the international aid community.  Here, he offers a skewering of the latest useless summit that is supposed to solve developing country problems. (You every notice these summits never actually take place IN developing countries?)

A sample:

The IGD has been around since 2003, and includes a lineup of really big names from the worlds of business, government, and aid. Chairpersons Albright and Powell were able to distill all of this experience and talent in their signature Journal oped yesterday into new ideas like “we have to focus our efforts where they can have maximum impact, and draw on the strengths of the public and private sectors alike.”

(Maybe we should subject this statement to the NOT test for meaningful content we discussed in a previous blog post: Briefly consider whether there is anyone arguing “we need to focus our efforts where they can have MINIMUM impact, and draw on the WEAKNESSES of the public and private sectors alike.”)

Job Losses

This is interesting - in that whole watching-a-car-accident-in-slow-motion is interesting.  Take a look at Michigan - and watch the decline in jobs even before the recession comes.

Definitions

By the way, claiming that the Obama administration is "socialist" is stupid.  It is evidence only that you do not know what the word socialism means.

Socialism refers to a system in which the government owns the means of production. In other words, the government owns capital employed in production (factories and office buildings).  There are still property rights for individual property (homes, cars, etc..).

[Communism, by the way, refers to a system in which the government owns *everything*. There are no property rights because there is no such thing as individual property.]

It's unclear what about the Obama administration is supposed to be "socialist".  I suppose that if they have to nationalize banks, that would constitute a socialist situation.

However, it seems like people are confusing higher tax rates on relatively high-income individuals with socialism.  There is nothing about the tax rate that has meaning in socialism.  You can have a low-tax socialist country or a high-tax socialist country.

Regulation is not equal to socialism.  We've been a capitalist country for a long time, and always had regulation of some kind or the other.  Government spending is not equal to socialism.  We've been a capitalist country for a long time, and always had some government spending of some kind or the other.

If you want to argue for less regulation and less government spending - fine.  But don't be an idiot and call the opposite "socialism".

Earmarks

We're talking about government spending in class this week.  One thing that is interesting to do is....actually look at the government budget.  You can download it from the White House website.

One thing that people rail at a lot is earmarks. John McCain is on fire with this recently.  Remember the "Bridge to Nowhere" in Alaska?  Earmark.  So just how insidious are these possibly frivolous items?  Several watchdog groups put the total amount of earmarks at nearly $18 billion dollars.  That's a lot of money that is allegedly wasted (not every earmark is by definition a stupid use of money).

But relative to the entire government budget, earmarks are essentially a rounding error.  Total spending in the Obama administration 2009 budget is just under $4.0 trillion dollars.  So earmarks make up under one-half of one percent of the entire budget.  In comparison, defense spending is $666 billion, social security is $662 billion, and Medicare is $425 billion.  If you really want to address the size of government spending, you have to address these areas.  (Also an interesting comparison - all the other agencies of the government: Housing, Agriculture, Interior, Veterans, the FDA, the SEC, etc. etc... add up to a total of $613 billion).

Also, you have to realize that earmarks do not *add* money to the budget, they allocate money in the budget. If you removed all earmarks, the government spending would not fall - it would just leave $18 billion to the discretion of the agencies to spend.  If you want spending to fall, you have to actually, you know, cut spending.

It's not China's fault

We're going over international trade in my intermediate class.  This means that we're going over all the stupid notions people have about trade.  This is frustrating enough for me that I thought I would point them all out so you know not to say these things in my presence:

1) "We have a trade deficit because other countries cheat" - No.  We have a trade deficit because we would like to consume lots of stuff *right now*.  We can't produce all the stuff we want to consume *right now*.  So we pay the Chinese and Japanese to make it for us.  How do we pay?  By agreeing to pay them back tomorrow.

Trading with China is no different than "trading" with Sears for a new refrigerator, bought on credit.  Sears loans you the money ("no payments until 2010!") to buy the refrigerator.  You get the fridge *right now*, and will slowly pay back Sears over the next three years, say.  Equivalently, China loans us the money ("just pay us back in interest payments on U.S. bonds in 2010!") to buy boxes full of cheap plastic Disney princess crap. We get the Disney princess crap *right now*, and will pay them back over the next 3, 7, or 10 years depending on what kind of bonds the Chinese are holding.

Saying that China is "cheating" is like saying that Sears is "cheating".  How dare they allow you to freely purchase goods and services that you enjoy!!   Those bastards.

2) "The Chinese are going to own America."   Really.  China holds, by current estimates, about $740 billion in U.S. treasury bonds.  Japan owns about $640 billion.  That's a lot.  U.S. GDP in 2009, in the middle of the worst recession since the early 1980's, will be about $12 trillion.  That's a LOT more.

And you know what we own that they don't?  Printing presses and the master plates that allow us to rip off all the copies of George Washington that we want.  You know what all those U.S. bonds say on the front?  They say that the interest and principal is payable in U.S. dollars, and U.S. dollars ONLY.  If we wanted to, we could print off $1.38 trillion in new bills and ship them off to China and Japan to pay off all those bonds --- and there is nothing they can do about it.

You think they have us by the balls? No.  Imagine that you could pay off your mortgage and credit card debt by shipping a box full of old newspaper to your bank.  Who do you think would lay awake worrying about that happening - you or the bank?

3) "Trade deficits are bad."  I only have one question for you.  Why?  Give me one coherent reason that does not appeal to the fact that the people with the trade surpluses have funny-shaped eyes and live somewhere else.

4) "We need a strong exchange rate." Okay, that's great.  A strong exchange rate means that your dollars can buy a lot of euros, yen, or yuan.  With all those euros, yen, and yuan, you can buy up lots of Belgian beer, Sony DVD players, and more cheap Disney princess crap.  Oh, and you know what?  That means you'll be running a bigger trade deficit.  Exchange rate up, trade deficit up.  Exchange rate down, trade deficit down.

So shut up about your strong exchange rate and your whining about the trade deficit until you understand that these are mutually inconsistent.

5) "The U.S. doesn't make anything anymore."  Oh, really?  What do you do all day, pick your ass?  Well, for some of you, that's probably true. The rest of us are doing high-skilled jobs that people pay a lot of money for. We're the richest f***ing country on earth for a reason - we are better at pretty much everything than every other country.  You know what we make?  The original Disney movie that spawned all that cheap Disney princess crap.  You know what the Chinese get for injection-molding another Cinderella doll?  About 25 cents.  You know what Disney gets when they sell that cheap plastic piece of crap to me so that I can let Abby pretend that some day she'll have ankles the size of toothpicks?  About $10.  Do the math.

6) "Indians are taking all of our jobs."  Right. Because a lot of you are really dying to answer help-desk calls from Donna the receptionist who can't get her mouse-thingy to do the clicky thing to make the invites for the company picnic print out sideways ("why do they call it landscape, you think? It's not like there's any grass on it? He he.").  In the next 5 years, American companies will probably hire about 3,000,000 foreigners to answer calls and do back-office work.

In a non-recession year, you know how many jobs American companies "destroy" every MONTH through simple attrition and turnover?  Just about 2,000,000.  Every MONTH.  That means in the next 5 years there will be about 120,000,000 jobs destroyed by American companies.  During the same period, American companies will create about 140,000,000 new jobs.

Outsourcing is a rounding error for the American economy. So shut up.

GM

So this article says that the new GM chief is really going to buckle down and provide a real turn-around plan for the hopeless car company.  I understand that trying to change the course of a super-tanker sized company like GM can't be done immediately.  But it seems to me that this super-tanker has actually run aground, and Fritz Henderson can pull on the tiller all he wants, the company isn't going anywhere.

It's done. Let it die.  Auction off the different brands to Toyota, Honda, VW, etc.. and let them pick over the wreckage to salvage as much value as possible.  But stop pretending that GM is a viable company.

Not that this in any way, shape, or form should be seen as supporting the fact that the President of the U.S. fired the CEO of a company.  That is just not right.

More smart takes on Geithner

Here is Brad DeLong's Q&A about the plan and its potential .  He comes down on the positive side, but noting that this is "part of the plan", not "THE plan".  That is, this will not magically fix everything wrong with the economy.

The rationale for the Geithner plan is roughly as follows:
a) "toxic" assets (mortgage-backed securities) are worth less than they originally were, but they are not worthless.
b) Normally, we'd see different financial groups (hedge funds, private equity funds) buying up these toxic assets for pennies on the dollar, and making a handsome profit as either i) the market comes to its senses and they can resell these assets for more pennies, or ii) they just hold the assets to maturity, banking the monthly mortgage payments that fund these assets.
c) Times are not normal, and no financial groups are stepping up to buy these toxic assets. Mainly because they cannot secure funding from the major banks.
d) The Treasury is going to step in and buy up these assets. To manage this, they are going to hire the financial groups (hedge funds and private equity funds) to do the actual purchasing.  They'll pay these financial groups by giving them a share of the profits that the Treasury thinks it could make by buying up the assets for pennies.
e) By buying up these assets from the major banks, the major banks will no longer look like hedge funds and will be able to resume acting like real, boring, regular, banks.

It's important to note that we are not buying these toxic assets for the hedge fund managers.  We are buying them for ourselves.  We're paying the hedge funds to do the buying, and giving them a cut.  It's like engaging a realtor to buy a house. They get a cut of the transaction - you get the house.

Could the Treasury make money on this?  Yes.  Will they?  Don't know.  Why bother?  Because it gets the toxic assets off the bank balance sheets, and therefore banks can go back to being banks. That will help the regular economy get moving.

Toxic Asset Plans

Geithner announced the governments public/private plan to buy off toxic assets from banks, using private investors as a mechanism to figure out the "right" prices.

This post has a nice example of what the situation looks like, told as a story about a car dealership that has a number of lemons in its stock of cars.  I think it gets you the idea of what the problems and potential solutions are.

The upshot - there is no plan that can "fix" the financial system without putting taxpayer money at risk.  If you do not want any taxpayer money at risk, then you have to wait for the financial system to fix itself.  That's a legitimate position - but you might want to ask the Japanese how that worked out for them over the last 10-12 years.

AIG

More economic fun!  Lot's of anger over AIG managers getting bonuses even though they've basically burned through the whole $170 billion we gave them to keep them from blowing up.  Now Congress wants to tax the bonuses at 90%.  A few thoughts on this:

a) I'm really nervous about Congress making retroactive tax changes.  This is just larceny, but legal.  If they want to prevent *future* bonuses of this kind, fine.  But given this precedent, what's to stop them from re-taxing income from 2007, and asking me for an additional $100 or $200?

b) With that caveat in mind, I'm not sympathetic at all to the argument coming from the financial industry in general, and AIG in particular.  They will say that they have to pay these bonuses to keep the upper management types around who actually know what's going on in these companies and are capable of cleaning up the mess.  I'm calling bullshit on this one.

Upper management types at financial companies (and I know I'm grossly over-generalizing here) are not the "best and the brightest" of the world.  They are, by and large, those really fun guys you knew in college who always were scoring chicks and getting C's.  They're salesmen.  While they do know the details of the contracts they wrote, it's quite clear from the past two years that they didn't actually know what they were doing.  So why exactly do I want them "fixing" this mess?

I explicitly want new people to go in and clean up AIG.  I want people without emotional attachments to the business, and in particular, without personal ties to anyone involved in the contract.  I want cold-blooded killer CPA's with a mean streak and some repressed daddy-issues. 

I want to get *rid* of the golf-course financial deal-makers who couldn't be bothered to think about the risk implications of their deal-making.  They were never hired to be good risk-managers.  They were hired because they knew how to stroke pension-fund managers and were a good time in the corporate box at the Super Bowl. 

If those kinds of guys are going to leave AIG, or any other financial company, because their bonuses are going to be taxed away, then let them leave. 

Quantitative Easing

The Fed announced yesterday that they would begin buying up close to $1.2 trillion in long-term debt - mortgages, 10-year Treasury bonds, etc.  So 1) why did they do this, and 2) why might you care?

1) Why do this?  The Fed has the long-run objectives of keeping inflation low and maintaining the economy at close to full employment.  In normal times, they pursue these objectives by setting short-term interest rates - the rate of interest that banks charge each other for short-term loans (short-term as in overnight or for one-month). If the Fed wants the interest rate to fall, they buy up short-term Treasury bills from banks.  To pay for these T-bills, they credit the banks reserve account at the Fed.  In normal times, these additional reserves allow the banks to lend more money to the economy - meaning that there is a higher supply of loans, and their cost (i.e. the interest rate on your car loan) goes down.

But these are not normal times.  The Fed has very aggressively cut interest rates by buying up lots and lots of short-term T-bills from banks.  They have paid for these by crediting the banks reserve accounts.  The banks have taken these reserves.......and done nothing with them.  The reserves are "piling up" in the bank vault, rather than being loaned out to you to buy a new car or to a business to expand their factory.  (They don't really have piles of physical money, just entries in a computer, but it's more fun to think of the Fed operating like Gringott's in Harry Potter, with little Alan Greenspan-cloned goblins moving mining cars full of gold back and forth.)

So the Fed has driven the short-term interest rate down to essentially 0 percent, but the banks have simply sat on their new pile of reserves.  We do not get the expansion of credit that the economy could use to get economic activity moving more quickly again.

This is a rare problem.  The Fed cannot lower short-term interest rates below zero (imagine if they did - this would be like a bank offering to pay you back $98 dollars in a year if you deposited $100 today - not a good deal).  But the Fed would still like to generate more economic activity by driving down interest rates. 

The interest rates that tend to matter to you and me are long-run rates like a) mortgage rates, b) car loan rates, c) student loan rates, d) long-run Treasury bonds (because they matter for retirement accounts and influence stock returns).  So the Fed is going to try to more directly affect long-run rates.  They're going to start by buying up T-bonds, mortgages, and packages of car loans and student loans.  Their increased purchases raise demand for these products, which raises their price.  If the price of a bond or mortgage goes up, the effective interest rate on bonds and mortgages goes down.  The Fed is trying to drive down the rates available on new loans and mortgages, so that you, me, and firms will undertake new investment projects (like re-doing your kitchen or building a new factory).  If we start doing this, it drives up demand for goods and services and the economy recovers. 

2) Why might you care?  Well, for one you can probably score lower rates on any new loans.  So buying a new car or house just got less expensive.  That's pretty cool. 

Perhaps more of an issue is that this quantitative easing contains within it the seeds of higher inflation. Why is this?  Well, the Fed is going to buy up lots of bonds and mortgages.  How do they pay for this?  They "print" money.  Bernanke doesn't literally call down to the boys in the basement and yell "fire up the presses!!".  He "prints" money by crediting the bank acounts of those people from whom it bought the securities. 

So this is similar to just printing about $1.2 trillion in new dollar bills and spreading them around.  Now in a slack economy like the U.S., this should increase economy activity rather than drive up prices.  But if the Fed printed too much money (and they don't really know what the "right" amount is) then some of this additional money will simply go towards driving up prices. 

Why do you care about inflation?  No, not because it makes things more expensive.  Inflation is a general increase in prices, and that includes wages.  So inflation by itself doesn't necessarily make you worse off.  In fact, if you are like me and a) young (ish) and b) in debt, then inflation can actually be good for you.  Those mortgage payments don't rise with inflation, but wages do. So in the long-run, big inflation can actually make me better off.

The problem with potentially high inflation is that it generates uncertainty about the future (how long will my dollars be worth anything?) and therefore tends to stifle economic activity and - perversely - will generate higher interest rates in the long-run.

So you should be worried that the Fed is going too big and too strong, and will ignite large inflation rates that will screw us over in the long-run.  At this point, I can see why the Fed is willing to make this kind of bet.  But it is a bet - not a certainty.  This could go wrong.  My first gut reaction, though, is that this will not turn us into Zimbabwe or Weimar Germany (i.e. places with 1000% inflation rates).

Sigh.

I guess I shouldn't care that some people are so galactically stupid, but come on.  This article is about people who are planning on lowering their income below $250,000 a year so that they can avoid the tax increase proposed by the Obama administration.

Stop. Think about it for a minute.  Take a look at your tax packet from the IRS.   If the tax rate on income ABOVE $250,000 goes up, that doesn't mean that tax rates on income under $250,000 go up.  If you make $300,000 a year, your total tax bill will go up and your take-home income will go down.  If you lower your income to $249,999.99 a year, your income will go down by MORE.

You can't make more by making less.  But maybe the idiots in this article deserve to make less.

Don't you economists know anything?

It seems like economists should have something more to offer everyone with regard to the current recession. Why don't we have an economic early warning system, so that we can track economic crises like we track hurricanes, and get people out of the way before they hit?

The problem is that this comparison gives a) too much credit to NOAA and hurricane forecasters, and b) too little credit to economics.  Think for a moment about what NOAA does.  It identifies tropical depressions out in the Atlantic, and then starts estimating if they will turn into hurricanes, and if they do, estimating where they will go. NOAA does an okay job of that.  You know those bigs "cones of death" that surround the projected path of the hurricane? That's because NOAA is guessing, and lot's of times they are *wrong*.  Remember Katrina? It wasn't supposed to go that way, which was part of the reason New Orleans was unprepared.

Fine, but we don't even have a "cone of death" for the economy, do we?  Actually, we do. The Fed and other macro-economic forecasters have plenty of models (just like NOAA) that predict where the economy will go over time. Some of them have the recession ending this summer, some have it ending this fall/winter. Most have economic growth resuming in 2010.  So the failure of economics is not one of failing to track and predict the path of the crisis.  The failure, if there is one, was in not predicting the crisis was coming in the first place.

This, though, asks for a lot out of economics.  Consider the hurrican analogy.  NOAA is very good at tracking hurricanes, conditional on the presence of a tropical depression.  They are very *bad* at predicting when, where, and how often tropical depressions will form in the Atlantic.  (Remember that 2006 was supposed to be the mother of all hurricane seasons?  Whoops.).  Asking economics to have predicted this recent financial crisis is like asking NOAA to predict (with near certainty) when, where, and how many hurricanes will hit this year.

That said, it seems fair to ask why economists haven't focused more on the nuts and bolts of the financial markets and how they *could* create a crisis, so that we could write down some clearer rules about what to do when those crises actually strike. There is a sense that the Fed and Treasury are really just making this up as they go along.  Well, they are. We've had one (maybe two) of these financial crises in the last 100 years in the U.S. prior to this one.  There isn't exactly a big body of evidence to draw conclusions from.  NOAA has the advantage of at least having a few hurricanes a year, regularly, to study.

The additional problem is that "fixing" the economy is not a technological question for engineers. You cannot enact economic policy without, by definition, redistributing wealth.  From taxpayers to financial companies. From shareholders to taxpayers. From employed workers to unemployed workers. From some corporations to other corporations. From future taxpayers to current taxpayers. From home-owners in the middle of the U.S. to home-owners on the coasts. Or vice versa on any of the above.

Engineers can get into arguments about the best way to fix a problem.  But no one in the engineering meeting ever stands up and says, "Your argument for using 15 millimeter bolts to secure the exhaust manifold to the differential gear assembly is just another example of left-wing bolt-and-tighten liberalism. America was founded by welders and for welders, and therefore we should weld the exhaust manifold to the differential gear assembly!  That is what true Americans want. Your bolts are just another example of trying to import European-style bolt sizing and attachment mechanisms into our economy."

Economics is necessarily strung up together with politics.  So that makes it hard to separate political disagreements from economic one. Economics is pretty good at monetary policy. We have some decent ideas about how/why fiscal stimulus works.  But the failure to have some consensus about "what the government should do" is not the fault of economists. This is how policy gets made.  People argue and dispute with each other.  This is it. This is as certain as things get.

Your credit crisis

The cartoon version!  This is actually a pretty nice explanation of what went down. I'm thinking of playing this for my class when we get to the financial crisis in the next couple of weeks.


The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Un-cynicize yourself

This post, by Paul Ormerod, makes (briefly) the case that we should thank our lucky stars for the all the bailouts and TARPs we've had over the last year:

Why should be be thankful that the Fed and Treasury have kept these banks going?  Because without their actions, we'd be much more likely to be in a real Depression-like situation with deflating prices and massive unemployment.

How does this work. Take a few simple macroeconomic relationships.  First, we can generally state that changes in the money supply translate into changes in prices (and sometimes in the short run, into changes in real GDP). So if we let the money supply fall, then prices will fall (deflation) and we get into a world of pain.  In the real Great Depression, the money supply fell, prices fell, and the deflation ruined everyone who was in debt and basically put a full stop to all real investment activity (like building a new factory or buying a new machine tool).

The reason the money supply fell in the GD was not that the Fed didn't "print enough money".  They did increase the supply of cash.  The problem was that banks and people were so scared that they squirrelled away the cash under their beds, so the effective money supply fell. 

What has happened today? People are scared, but not so scared that they are hiding cash under the mattress (the currency to deposit ratio has remained flat over the last year according to the Fed).  Banks are *really* scared, and are hoarding as much cash as they can get their hands on.  The reserve/deposit ratio (roughly the amount of money in the vault relative to the outstanding value of checking and savings accounts) has gone from under 1% to nearly 12% in the last year. 

If the Fed and Treasury had not furiously provided liquidity to the market, then this massive increase in reserves would have brought the money supply down severely (like, a 50% drop in the effective money supply) and that would have certainly put us on the path to deflation and a much worse economic outlook.

I'm not saying this for certain, but it is not impossible that people will look back at 2008/2009 and say that the Fed and Treasury did an amazing job of preventing another Depression. 

So now what is up with the remaining TARP funds?  We may have arrested the slide, but banks are still sitting on tons of bad loans and so are still hoarding funds.  To end this and get the financial system back to "normal" (albeit hopefully with a little more aversion to risky loans) requires getting banks to come clean on where they stand, and getting them to write down the value of their bad loans.  This means a) banks will fail, and b) other banks will require additional capital - probably both public and private.  Once we get the banks clean, the reserve ratio (that 12% number) will drop and that will free up the cash to provide the loans that are necessary to make the world of business go around.  (Note that we're not talking about crazy loans to buy mortgages, but loans to businesses to make payroll while they wait for accounts receivable to clear).

Financial Stability Plan

Today Tim Geithner accounced the Administration's plan to.........well, I have no idea what exactly the plan is. From what I can tell, they are getting organized to "fix" the financial system by "dealing" with the toxic assets (the mortgage backed securities that no one knows the value of).

There were no details, and absolutely no commitments to any specific policy or action. I think this is why the stock market was dropping.  It's not down because the plan sucks, its down because in the time between Election Day and now, the Treasury has come up with nothing specific. 

Just pull the trigger.  Take the remaining TARP funds and buy up the toxic assets.  Pick a freaking price out a hat if you have to, but buy them up and get them off the banks balance sheets.  If the price the Treasury pays is too high, then the taxpayers take the loss.  If the price that Treasury pays is really low, then the shareholders of the banks get shafted.  Honestly, I don't care, because the lack of a coherent plan is causing this recession to be so severe.  Banks won't lend so long as they have these toxic assets on their books, so get them off.

[Note that this presumes you care about banks not lending at all.  It's perfectly defensible to say "screw the banks" and let them figure it out for themselves. This just means a distinct lack of bank activity and that will likely cause further contractions in businesses while they try to find new sources of funds.  But if you're okay with that cost so that we don't bail out the jack-offs that caused this, fine by me.]

Without certainty, the recession will continue for longer than necessary. Make a decision and go with it.

History doesn't repeat itself - but it does rhyme

This was written by some blogger about the attempts to pass the economic package through Congress. Take a look.  Then look at the date.

Even Stupider

If housing stimulus is dumb, then the "Buy America" provisions in the stimulus bill are galactically stupid. This is idiotic, economically-ignorant, pandering bullshit of the Nth degree.

Let's count the ways in which this is so colossally retarded:
1) It's illegal.  We signed a whole bunch of really fancy treaties that say we won't do this.

2) It's useless. Trade deficits arise because we are less patient than other countries.  We would like to consume goods today, while they are willing to wait until tomorrow.  So they sell us the stuff today (a trade deficit), with the agreement that we'll pay them back with other stuff tomorrow (a trade surplus in the future).  We like to have stuff today rather than tomorrow.  If you say that the stimulus money has to be spent on U.S. goods, great.  We'll still have a trade deficit unless our savings behavior changes.

3) It's inefficient.  The reason that U.S. steel and concrete companies are struggling is because they suck at what they do.  They charge too much for their product, and so people buy their steel and concrete from the cheaper Chinese and Mexican firms.  If you buy only U.S. steel and concrete, you are literally burning up money.  Say we need 1,000 tons of steel to build a new bridge.  If we buy only U.S. steel, this will cost us $200,000.  If we buy Chinese steel, this will cost us $100,000, leaving $100,000 left over to buy other new things (like a school).

4) It'll backfire.  Companies in the U.S. sell a lot of stuff overseas.  I know we have a trade deficit, but we happen to export about $1.5 trillion worth of stuff every year.  If we pass this stupid rule, then you know what? Other countries will do the same thing, and our exports will collapse.  You know what happens when GE and Catepillar can't export anything?  They fire people.

Stupid, stupid, stupid, stupid, stupid.

Housing Stimulus Provision

The Senate, according to this, is thinking about several measures to boost the housing sector.  Why on earth would we possibly want to do this?  The whole point of the financial crisis was that the housing market was way over-valued, and the realization of this led - all at once - to a big drop in housing prices and put a lot of banks in a bad position.  But that doesn't mean that the drop in housing prices was unwarranted!

The problem with a financial crisis/recession is that not only do the financial Einstein's who made the wrong bets on housing get hosed, but so do lot's of innocent people in the rest of the economy.  So I understand the need to stimulate the economy and cushion the blow to those innocents.  This may require us taking stakes in banks or bailing them out.  But I don't understand how trying to re-inflate the housing bubble has any value whatsoever.  We want to ease the transition into a future in which real estate is fairly valued, not over-valued.

This all just sounds dumb, but then again it is the Senate.

It's always about the cows

Here you go, just about the simplest explanation of how a giant financial company can destroy itself:

"You have two cows.

John Paulson borrows one cow so he can sell it for $100. He gives you $10 as collateral.

You buy your neighbors cow for $100, which you finance by taking out a $90 loan from the bank and use John's $10 to make up the rest.

You brag to everyone about your financial health. You have assets--two cows you own, plus one Paulson owes you--worth $300, and liabilities of just $100.

A third of the country goes vegetarian.

You thought your two cows were worth $200 and now they are worth $140.

You express confidence in your financial health. Your assets are now worth only $200--your two cows plus the one John owes you--but your liabilities are still only $100. If necessary, you could sell the assets at this distressed price and pay off all your loans.

You hold onto your cows because you are sure the market is "dislocated." Some day someone will want to eat beef again.

The rest of the country goes vegetarian. Your two cows are now worth $2 each to guys who want to make dog food.

John Paulson buys a cow in the market for $2 and he gives it to you as repayment of the loan. You now have three cows worth six bucks.

John wants his $10 back.

The bank calls. It wants its $90 back.

You call the Federal Reserve and ask for a bailout."

Alright, this is cool, but doesn't it leave out the most important question: why does everyone go vegetarian?  Was it obvious that the country was going to go veggie? Should you have seen this coming? Did you willfully ignore the vegination of the country, or was this really a big surprise?  

It seems that this little story is missing out on the fact that we could all tell that the beef industry was in a boom and that vegetarianism was on the horizon, but no one stopped buying and selling cows. 

Why?