sit beside the breakfast table, think about your troubles

The Arsenal Mall disintegrates slowly. Two of the larger but older stores – FYE and B.Dalton – are in the midst of a 50% off everything, clean out the store sale. Browsing through marked-down and ignored books, I could almost hear the regretful managers’ conferences on January 5th – “it was a good holiday season, but not as good as we would have liked” – in the back of my mind. I don’t know if the era of the small outlet store has come to a close, but I do know that a retailer’s business model should hinge on providing something that Amazon can’t.

# # #

I have this conversation every few weeks – mostly recently with Liz over a beer earlier this week. Here’s the gist of it:

I don’t drink coffee. I’ve spent my mornings in places where coffee has been readily available to me for the last ten years – colleges, offices – but I’ve never started drinking it. I don’t drink much caffeine as a rule: more than one Diet Coke in a day is excessive for me. Only recently have I started using that five-hour energy stuff, which contains about as much caffeine as a cup of coffee but not as much sugar. It’s mostly niacin and B-12. Mostly.

Having made a searching and fearless moral inventory, I suspect that my refusal to drink coffee comes from two pieces of art:

1. Heat. At some point I made a conscious choice to minimize the number of addictions I have to deal with. Contact lenses already make my life somewhat inconvenient. Add to that the battery of allergy meds I take between April and May and I feel like I’m dragging a hand truck behind me. I can’t change that, but I can reduce the number of morning rituals I add on to it. Don’t let yourself get attached to anything you are not willing to walk out on in 30 seconds flat if you feel the heat around the corner.

   (“That’s the discipline.”
   “That’s pretty vacant.”)

2. Memoir from Antproof Case. I first got turned on to Mark Helprin in high school, when my dad lent me Memoir after he’d finished reading it. It’s a charming novel about the varied adventures of a man who’s lived for most of the 20th century. He’s robbed banks, had affairs with heiresses, befriended piano tuners and killed a couple of people. And he detests the smell of coffee.

   [T]he former commandante took me aside years ago and told me that if I ever brought up the subject again or threatened cadets or instructors who drink coffee, I would be dismissed. I wouldn’t have to drink coffee, he said, but I hadn’t the right to prevent others from doing so. After all, this was Brazil, and who was I to prohibit the Brazilian navy from partaking of so innocent a pleasure as coffee drinking?

   “It isn’t a pleasure,” I snapped. “It’s a sin. It’s the devil’s nectar. It’s filthy and unhealthy and it enslaves half the world.”

   The protagonist holds to this belief partly out of sense – caffeine’s an addictive, weird little drug – and partly out of idiosyncrasy. As a teenager, a tenuous mixture of sense and idiosyncrasy fit me right down to my socks. “Here’s something I could do to be different,” I thought, and from that point on I was lost.

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.

cash rules everything around me

So I was sitting on the roof of the Temple, cooling my heels and drinking an Ecto Cooler Hi-C, when the devil appeared behind me.

“Hey Satan,” I said.

“Hey Professor,” he said, sitting down next to me. He kicked his feet over the side.

“I guess you’ve heard that shit’s pretty bad, what with the collapse of subprime mortgages … banks writing off tens of billions in revenue … people losing their homes …”

“But I’m guessing you have a plan, right?”

“Hear me out,” he said, gesturing animatedly. “First, we lower the Fed funds rate by 1.5% – half at an emergency meeting, half during a scheduled meeting. This’ll encourage people to take out loans and buy more stuff, because interest rates will be lower.”

“It’ll also discourage people from saving,” I said, “because, like you said, interest rates will be lower.”

“But that’s the beauty of it!” He smacked me on the shoulder with a rolled-up copy of Variety. “The Fed funds rate is also the rate at which banks can lend money to each other. So if a bank wants to write a loan but doesn’t have the cash available, they can borrow money from another bank!”

I sighed and bit my lip. “Is there a second part?”

“Are you ready?”

I nodded and put on my best expectant look.

The devil stood up, spreading his hands dramatically. “We’re going to give every American taxpayer … three hundred dollars!” He waited for my applause.

“And?” I asked.

He snorted. “It’s like you never even studied economics, man! Increased consumer spending will jumpstart the economy!”

“How?”

“You know … give it a jolt.” He could see I wasn’t buying it and his face fell.

“What exactly is wrong with the economy currently?” I asked.

He didn’t have an answer, so I told him: “Let’s say you’re playing blackjack with a seven-deck shoe. You’re counting cards and you’re pretty good at it, so you think that the dealer’s all out of face low^* cards. You start putting more and more money on the table. With me so far?”

“Sure,” said Lucifer. “I love Vegas.”

“But maybe your count was off, or you were misinformed and there’s actually eight or nine decks in play. So there are more face low^* cards than you expected. You start losing money.”

“I don’t like this story.”

“And now other players are walking away from the table, meaning all the bad cards are coming to you now. You start busting on every hand. You keep doubling your bet, because you heard from some guy that that was a good way to stay ahead, but that just means you’re hemorrhaging money that much faster.

“Now,” I concluded, “instead of face low^* cards, it’s ‘housing prices.’ Instead of hands of blackjack, it’s ‘investment in mortgage-based securities.’ And the players at the table are the largest financial institutions in the country – Wachovia, Merrill Lynch, Bank of America, etc.”

“No, no, it’s not that simple.”

“No, it’s exactly that simple. Investors gambled that mortgage-based securities would keep paying off. This was a speculation based on the notion that housing prices would keep rising. They didn’t. Investors kept shoveling money into subprime funds in the hopes that they’d rebound, or that they could sell them to someone else. They couldn’t.

“And what part of this whole exchange,” I concluded, “would be improved by consumers getting the equivalent of an additional paycheck?”

“But … but … consumer spending …” the devil whined.

“The money’s coming in the form of additional tax refunds,” I said. “Meaning it’s being transferred from the federal government to citizens. What would the feds have done with that money if they kept it?”

“Spent it.”

“What are they hoping citizens will do with it?”

“Spend it.”

“So either the feds spend one hundred billion dollars,” I continued, doing some quick math in my head, “on highways and dams and bomber jets and bridges that don’t go anywhere, or consumers spend one hundred billion dollars on food and clothing and cars and the Nintendo Wii. Where’s the ‘jumpstart’ here? Where’s the kick in the pants?”

“Yeah, but, c’mon!” The devil smiled, laughing weakly and dismissing my objections with a wave. “We’re putting money back into people’s hands, rather than letting the government spend it. I thought you were a libertarian! You know: ‘taxation is theft’ and all that.

“That’s a question of what level of taxation is moral,” I said. “That’s irrelevant. This is a question of what’s actually going to happen. It’s like … it’s like debating whether or not to kill someone by dropping a weight on their head, vs. debating whether or not gravity is real.”

“So you’re telling me the economic stimulus won’t have any effect on net?”

“I didn’t say that. The federal government is now one hundred billion dollars out of pocket. Do you really think Congress will cut the U.S. government’s budget by one hundred billion dollars? Or any significant fraction of that?”

“So the U.S. government goes another hundred billion into debt,” Satan said.

“Which means inflation,” I said.

“And lower interest rates mean easier credit and more loans.”

“Which means inflation.”

“I don’t suppose inflation’s good for the economy, is it?”

“Inflation encourages borrowing and penalizes saving,” I said. “What’s the point of putting money in a 401(k) that earns 7% if prices inflate 8% every year? Better to just buy a car, or a house, or something I can actually wrap my hands around and enjoy. Better to go into debt; the money I put toward interest payments will be worth less and less each year.”

“But everyone’s buying stuff!” Satan said, making one last-ditch effort. “And that stimulates demand, so people will start producing more …”

“So if I’m the Gap, and I see people spending their refund checks on my sweaters, I order up a thousand more sweaters than expected. Then what? People already spent their refund. I’ve got all these sweaters I intended to sell at $40, which I now have to mark down to $30 in order to sell. And since the thirty dollars a new customer pays for a sweater don’t go as far, thanks to inflation, I’m now worse off than before.”

The devil pouted, tracing doodles in the dust on the rooftop with his finger. Then he stood up. “Well, I tried.”

“No, definitely. Yeoman’s effort.”

“Same time next week?”

“I’ll be here.”

“Could you bring me an Ecto-Cooler Hi-C next time?”

“Apage, satanas,” I scowled.

He laughed. “I get that a lot.”

* * *

“Consumer spending” is a popular target for federal efforts because it ties directly to GDP, one of the most commonly cited statistics. More people spend money, businesses presume that there’s an increased demand for their products, and they start to produce more.

However, consumer spending is only part of the picture. The opposite side is consumer saving – individuals sinking money into savings accounts, money market accounts, the stock market and retirement funds. Investment also gets businesses to produce more.

The moral of this story: the economy is not a thermostat – it’s a thermometer. What we call “the economy” is an agglomeration of several favored statistics – the Dow Jones Industrial Average, the strength of the dollar, GDP per capita, inflation, unemployment, etc. If “the economy is doing well,” that means those numbers are high. If “the economy is doing poorly,” those numbers are low. But those are all statistics. They’re numbers that measure the performance of people and firms in the real world. I can’t just dial up one statistic without affecting everyone in the real world, anymore than I could crank up the thermostat without also increasing the amount of oil I consume.

Those are numbers on paper. This is the real world. And unless you see a pronounced change in the real world, there’s no reason to think changing the numbers will make a difference.
_________________________
^* pointed out that I had this exactly backward in the original draft – high cards in the deck favor the player, not the dealer.