dollars and cents and no accidents, not in the name of democracy

Time to rant about economics again.

First, some stupid journalism about housing:

After falling for six straight months, sales of existing homes posted an unexpected increase in February. But the median home price tumbled by the largest amount on record.

How did journalists meet deadlines before they could just hit CTRL-A, CTRL-C, CTRL-V on a press release? The above comes from a helpful e-mail from the National Association of Realtors, who I’m sure don’t have a pony in this race.

Rant #1: Why is there a “but” in that sentence? What do you expect sales to do when prices drop?

Rant #2: Patri Friedman pointed this one out: January is always the low point of the year for home sales. So a month-to-month increase between January and February should shock no one. Year-to-year, sales are still way down (here, have some graphs).

Second, Paul Krugman says something dumb again. If you’ve known me for a while, you’ll know I have no love for the man, possibly the dumbest popular writer on the subject of economics after Thomas “Being Wrong’s No Reason To Withdraw” Friedman. And that’s still a hotly contested spot! The rankings could switch any day now!

Krugman weighs in on the three candidates’ stances on the economy. He’s hurt and saddened by what the Democrats are spouting:

On the Democratic side, it’s somewhat disappointing that Barack Obama, whose campaign has understandably made a point of contrasting his early opposition to the Iraq war with Hillary Clinton’s initial support, has tried to score a twofer by suggesting that the war, in addition to all its other costs, is responsible for our economic troubles.

The war is indeed a grotesque waste of resources, which will place huge long-run burdens on the American public. But it’s just wrong to blame the war for our current economic mess: in the short run, wartime spending actually stimulates the economy. Remember, the lowest unemployment rate America has experienced over the last half-century came at the height of the Vietnam War.

(1) “In the short run, wartime spending actually stimulates the economy.” Thank the devil he qualified that one with “in the short run” or I’d be checking the signature on his diploma. Not that this is a more defensible statement.

As I’ve said before, the economy is not a thermostat - it’s a thermometer. What we call “the economy” is just a collection of statistics that experts believe measures the wealth of a set of people. A nice bloody war can increase capital spending (by defense contractors), for instance. But paying for that war inevitably means higher taxes or massive inflation. You can’t crank up one statistic without making the others fluctuate wildly.

The fact that Krugman defends this as a short-run gain means he’s at least anticipating the “but in the long run” objection. The fact that he offers nothing to that means he’s either a coward or a moron. Take your pick, America!

(2) “the lowest unemployment rate America has experienced over the last half-century came at the height of the Vietnam War.” First off, who’s complaining about unemployment right now? Sure, there’s griping over jobs moving overseas, but is anyone suggesting that unemployment’s a problem on the national scale? Unemployment’s at its lowest monthly average since 2003. How long did it take Krugman to cherry pick this statistic?

Second, if we go back 40 years, the numbers back him up: unemployment was at its lowest during the height of the Vietnam War. Once the war ended, however, and the U.S. had to actually start paying for its misadventure, unemployment shot back up. Between 1973 and 1983, unemployment hovered between 5 and 10%, typically on the higher end. We didn’t see “Vietnam levels of prosperity,” to use a term Krugman’s itching to get into the lexicon, until the dot-com bubble of the late 90s.

Third: I’m just reasoning from my armchair, here, but wouldn’t the forced conscription of a lot of able-bodied young men be a huge drain on the workforce? Wouldn’t reducing the supply of available laborers reduce the unemployment rate, in the same way that smashing every third camera on their shelves would reduce Best Buy’s inventory? Is this the sort of economic miracle Krugman’s looking for? Wouldn’t a great solution to the (nonexistent) unemployment problem be to shoot one out of every five Americans between the ages of 18 and 34? Or did Krugman simply not think about the consequences of his reasoning, as is standard?

America came out of the Great Depression with a pretty effective financial safety net, based on a fundamental quid pro quo: the government stood ready to rescue banks if they got in trouble, but only on the condition that those banks accept regulation of the risks they were allowed to take.

Over time, however, many of the roles traditionally filled by regulated banks were taken over by unregulated institutions — the “shadow banking system,” which relied on complex financial arrangements to bypass those safety regulations.

I pick on the “managerial liberalism” mindset a lot, to the point that I worry sometimes I’m attacking a strawman. But Krugman spells out exactly what’s wrong with it here and then blithely stumbles onward.

Here’s the history of central banking in this country, exactly as Krugman laid it out:

(1) Banks went wild.
(2) Regulations were created to restrain them.
(3) Pseudo-banks (e.g., savings and loan institutions) emerged to evade regulations.
(4) Pseudo-banks went wild.

Even if you don’t buy every step in his reasoning, can you see where it breaks down? #3 is a direct and inevitable result of #2. Investors saw regulations and looked for loopholes to exploit. Krugman’s solution is to revisit #2 - create more regulations. And apparently he doesn’t have the imagination to see that new institutions would arise to exploit those new loopholes. So either regulation doesn’t make humans better people, or …

I’m not an apologist for the healing power of free markets, any more than I am for the healing power of gravity. Gravity makes a lot of machines work. Gravity can also knock you on your ass if you’re not careful. But regardless of whether you like it or not, gravity’s a fact you can’t escape. You can’t pass a law to make it slower than 9.8 meters per second squared. So it is with supply and demand, inelastic commodities and incentives. Markets evolve; legislation does not.

Given the risks to the economy if the financial system melts down, this rescue mission [Bush's and the Fed's bailout] is justified.

Do I even need to address this?

It’s one thing for someone completely ignorant of the science to make these kind of mistakes - if you’re still subscribing to zero-sum economics or conspiracy theory economics or one of the many common stand-ins. But Krugman’s nominally an economist himself. He supposedly has a degree. But he’s so clearly surrendered the logic of economic thinking in the name of his own agenda - which is a weird agenda in its own right, by the way - that I wonder what he calls himself. How does he introduce himself at parties? What does he put on his resume? And so forth

you hate to see another tired man lay down his hand

In the wake of the subprime mortgage collapse, legendary brokerage house Bear Stearns lost 80% of its value in the year up to this past Friday, and 89% of its remaining value over the weekend. J.P. Morgan, in a deal financed by the Federal Reserve, will be buying Bear Stearns for $2 a share, or a total of $236 million (not billion).

Here’s a short list of better ways to spend $236,000,000 (inspiration for this idea c/o Brad at Sadly,No):

Alex Rodriguez: Possibly the best hitter of the modern era, Alex Rodriguez is the third baseman for the New York Yankees. His current contract is guaranteed by the Texas Rangers (not as storied a bank as the Federal Reserve, but no slouch) through 2010. J.P. Morgan could pick up the remainder of his contract with the Yankees (extended through 2018 after some recent shuffling) for probably a little shy of $236M. They’d then have an experienced hitter in the prime of his career, rather than the decrepit remains of a once great investment firm.

236,000 ounces of gold bullion: Gold recently made an historic close at over $1000 / oz. Valued for its rarity and luster in ancient days, gold’s value on the modern market is as a hedge against inflation. As the dollar devalues, the price of gold skyrockets. And with Bernanke cutting the Fed funds rate late on Sunday (and probably cutting it again later this week), the price of gold will probably continue to climb. Therefore, J.P. Morgan could invest $236M and end up with, maybe, $237M after holding their investment for a while. This would be preferable to throwing two hundred and thirty six million dollars into a fire.

The Harvard Business School Classes of 2008, 2009 and 2010: The Harvard Business School remains one of the most competitive and prestigious graduate business programs in the world. Harvard typically accepts between 1000 and 1050 students for its MBA program every year. Tuition runs about $77,150 per year (that includes room, board and expenses). J.P. Morgan could pay the entire cost for three classes full of MBA students - let’s say only those currently enrolled, so as not to flood the poor dears in Cambridge with cheapskate applicants next year. A fancy letter could arrive in the mail, “Dear So-and-So: Your entire tuition has been reimbursed thanks to a grant by J.P. Morgan. If you’d like to learn more about what America’s greatest investment firm can do for you, please contact our local recruiter.” Presuming that only one student in fifty ends up working for J.P. Morgan after receiving such generosity, do you seriously doubt that 63 Harvard Business School graduates couldn’t bring more than $263,000,000 to the company over their careers? Or is making sure your buddies at Bear Stearns get to retire with a decent nest egg a wiser bet?

This is Bear Stearns we’re talking about: a firm that weathered two World Wars, the Great Depression and any number of recessions until this past weekend. And this is the blow that leveled them. Bear Stearns was one of the heaviest riders on subprime mortgage bonds, but they were not the only one.