What to Read on the Banking Crisis

Readers will have noticed that with our main mission accomplished, we've largely retired from the econ4obama blogging to focus on our professional and family lives. We're still following Obama economic policy obsessively, however. With the stimulus package passed, by far the most important issue is how the administration deals with the banking crisis. On that topic, I read principally Paul Krugman, Yves Smith, and Simon Johnson. Mark Thoma's site is my favorite all-around economics site.

Worth Watching on the Crisis

Simon Johnson makes a very compelling case in his analysis of the crisis during his appearance on the Bill Moyers Journal. The world has turned upside down when the former chief economist of the IMF sounds like Noam Chomsky. I suggest watching the video, not just reading the transcript.

I haven't had a chance to watch it yet, but last week's Frontline episode on how the crisis happened also looks very good.

Obama's Speech Today on the Stimulus

The video is well worth watching. Great to see that he's finally going full throttle on this. There's no time to waste.

Moving

Just a quick announcement: taking advantage of falling prices, I've opened a new shop, over at http://jonahgelbach.blogspot.com/. Not sure how often I'll post; I guess the subtitle is a good guide.

Thanks to all those who've read this blog, and my posts on it. Thanks especially also to Don Pedro for his indulgence in inviting me to contribute.

See ya when I see ya.

JG

A Must See: President Obama's Final Words at the Campaign Staff Ball

This was from Wednesday night at the DC Armory, during the final official inaugural event:



A couple clarifications: 1) Neither I nor any of the other econ4obama bloggers was on the campaign staff. 2) Despite the open bar, I wasn't drunk when I shot this video! It's jittery because I was holding my little camera high above my head amidst a very excited crowd.

This land...

The Need for Stimulus

From this morning, here's a good discussion on the stimulus in a radio interview which includes James Galbraith. In many ways I think of this as Jamie's moment: he's always been a relentless scholar and advocate for Keynes, and we're all very much Keynesians now.

Paul Krugman and Mark Thoma are also good source for discussion of the stimulus.

Feminist Bean Counters to the Rescue

Two aspects of Obama's economics and other early appointments and pronouncements have troubled me for some time but this afternoon's advance announcement that Ray LaHood, a mediocre white male Republican from Illinois, will be appointed Secretary of Transportation in the morning has finally pushed me over the edge and compels me to post an item.

Two warning signs in Obama's early appointments that women would not be treated well in the senior most positions and that women's needs would not be seriously assessed in policy discussions were the appointments of Larry Summers and Rahm Emmanuel. Neither is known for their commitment to enhancing equal opportunity for women. Having Emmanuel as the ultimate gate keeper in the White House was a bad sign for all future appointments, and having Summers as the inside-the-White-House-czar of economic policy was a bad sign for the content of economic policy, at least as far as meeting women's needs goes.

So what has happened since these major bad signs in the immediate post November 4 period? Of 15 department secretaries, 14 have been announced: 12 are men and 2 are women, for a ratio of 14 percent--lower than women's share of Congress (which itself puts the US at the bottom of countries of similar economic standing). The Department of Labor position is still open. Let us hope that it is filled with a better choice with regard to expertise and commitment to equal opportunity.

In the context of the economic disaster that is upon us, these last two jobs, transportation and labor, are very important to the success of the economic recovery program, to make sure grants and contracts are efficiently and fairly let and appropriately monitored. And to make sure women and women -owned businesses get their fair share of the new work created. Sure, you don't need to be a woman to be a feminist and you don't need to be a feminist to make sure women are treated fairly, but all the research evidence suggests it helps. And the construction industry is not known for equal opportunity for women. Moreover, our last great publicly-funded economic recovery program was also not known for equal opportunity for women--in the great depression of the 1930s women were dismissed from jobs and they got very, very few of the new public works jobs made available.

Feminist economists and other academics have been buzzing about the need for a fair economic recovery program for more than a month. Somehow, discussion of creating jobs in education, child care and health care seemed to morph overnight in Obama's language to almost exclusive focus on jobs in transportation infrastructure and retrofitting buildings to be more energy efficient. Jobs in health care have become jobs to computerize records. Unless health care, education, and early care and development SERVICES are expanded, or jobs are created in other areas in which a substantial number of women have trained for and work in, women will not get a share of jobs commensurate to their share of unemployment (which was 42% in the third quarter of 2008). Economist Randy Albelda had an op ed in the Boston Globe in November on these points. Petitions making the same arguments have recently been circulated among historians and economists as well as networks of academics and activists working on caregiving issues (see The Take Care Net and Institute for Women's Policy Research websites, takecarenet.org and iwpr.org). These experts believe the economic recovery will not be successful unless women have access to a fair share of the employment and business opportunities, in areas both traditional and nontraditional for women. Moreover the petitions and their signers stress the need for good-quality jobs, jobs that include not only decent wages and health insurance but also family friendly benefits like paid sick time. With women 46 percent of the labor force, it would be folly to ignore job creation for them or to fail to create the kinds of jobs that can truly move our country forward.

One good sign is that on Friday the Obama Transition Team is slated to meet with leaders of women's organizations to discuss the economic stimulus package and proposals for economic recovery. I wonder if senior members of the economic team will be at the meeting and if, in view of appointments like Ray LaHood, which seemingly came out of nowhere with no discussion, everything isn't already a done deal. Several pundits have commented that so far neither Obama's appointments overall nor his recovery proposals give Americans anything to get positively excited about--there's no big vision in the recovery plan (nothing to capture the imagination). And there's not even basic competence in the appointment of Ray LaHood.

Of the 14 secretary appointments so far, 5 are minority men. There is not a single woman of color appointed to head a major department. Whoa. Why did I title this entry "feminist bean counters to the rescue"? I'm hoping another positive development will occur: that the person appointed to head the Labor Department will actually be a champion for workers of both genders and all races and ethnicities. I'm even hoping the ridiculously inept nomination of Ray LaHood can be stopped. There are many Republican policy makers who could make a substantive contribution at Transportation: Ray LaHood is not among them. And there are many women with expertise in transportation who could make a significant contribution to the economic recovery. If he gets that far, Ray LaHood is likely to serve as the joke of Obama's cabinet.

Moxie Momma

Geithner, Grace Under Pressure

While I was somewhat disappointed that Summers won't be tapped to run Treasury, I'm very relieved that it will be Geithner.

Jeff Frankel, who was in Geithner's presence yesterday --presumably when he got the call from Obama-- describes him as a cool customer and as a strong choice.

I enjoyed reading this piece by Noam Schreiber that paints a pretty nice picture of Geithner (h/t Steve Benen, more here). I can't begin to imagine his smarts if Rubin and Summers relied on this guy despite his relatively minimal training or background in finance and economics.

Fourteen Black Paintings

Since Jonah posted about Will.i.am's new song, I thought I'd share as well.

I put on Peter Gabriel's "Us" (link is to rhapsody) the other day and thought about Obama while listening to "Fourteen black paintings":

From the pain come the dream
From the dream come the vision
From the vision come the people
From the people come the power
From this power come the change

Right now, we need Summers

Jeff Frankel bets Obama will pick Summers for Treasury. I know there are many in the progressive blogosphere with strong negative feelings about Summers but I have to say that I think it would be a wise choice by Obama --assuming Obama feels he can personally get along with him.

The bottom line for me is that right now, the Treasury Secretary will likely be the second most powerful position in the administration. During this period of financial crisis we need someone who has a deep intellect and a sophisticated understanding of the interplay between macroeconomics and financial markets. Right now, we simply cannot afford to have anything less than the best person for the job. If we just focused on this criteria and put aside Summers' history of making offensive comments I think there's a compelling case for Summers.

Summers is by all accounts one of a small group of leading intellectual thinkers about macroeconomic policy. For those who are Krugman fans, Summers is one of a few who are at Krugman's level of intellect. (Krugman, in my view is simply not at all temperamentally well suited to be a Treasury Secretary). In addition to his intellect, Summers brings tremendous real world experience having already served at Treasury during the peso crisis and during the Asian financial crisis. Although he bears some responsibility for being involved in some of the missteps of the 1990s e.g. the financial deregulation that helped lay the foundation for the current financial crisis, I think that he probably has a deeper understanding of these mistakes than most of his critics and is not ideologically driven to defend them or repeat them.

I was somewhat reluctant to write this post not only because of Summer's controversial comments but also because I doubt it will make all that much difference to the currently severe economic conditions we are facing. Summers will certainly not be a savior. I see Summers as more of an insurance policy, as a way of minimizing the downside risks rather than dramatically changing the current situation. Two years from now we do not want to be engaged in second-guessing whether or not Obama picked the most capable person for the job.

Until recently, my feeling has been that if there was a fresh young talented person who say resembles a Larry Summers of 20 years ago who could serve as a strong Deputy under a Volcker or Tyson, that this might be a satisfactory alternative. Maybe such a person exists but I certainly don't know who it is. As for Geithner --he wouldn't be bad but I think we're well served with him remaining at the Fed.

Obama Campaign Photos

There are many great sites out there celebrating President-elect Obama's victory. Here's one of my favorites: professional photographer Scout Tufankjian's photos from two years of following the campaign.

The Fair Model and the Crisis

I've been trying to figure out a way to argue the case for more short-term stimulus in a way that might appeal to those worried about deficits over the longer term. It is likely that a stimulus that reduces the duration and intensity of the recession will result in a lower national debt over the medium-term horizon (say, 5-10 years). This is because the longer and deeper the recession is, the more government revenue will suffer.

I thought to run Ray Fair's macro model to quantify what government debt might look several years in the future, with and without a stimulus package now. Empirical forecasting models like this one suffer from the Lucas critique, but they're the best we have.

My intents were stymied, however, by the fact that the most baseline run of the model doesn't forecast a severe recession. Here's what the model's forecast memo of October 30 says:

Real GDP Growth and the Unemployment Rate: The model is predicting no growth in the next two quarters, 1.7 percent in 2009:2, and 2.3 percent in 2009:3. The unemployment rate rises to 6.9 percent in 2009:3.
....
The negative wealth effect from the fall in stock prices ... is one of the reasons the model is predicting no growth for the next two quarters. There is, however, nothing in the initial conditions and likely paths of the exogenous variables that suggests there is going to be a deep and prolonged recession. It may be, of course, because of the current financial crisis that consumers and investors are concerned enough or restricted enough in their ability to borrow that they decrease their spending by huge amounts. These potential "animal spirits" and "credit crunch" effects are not the type that the model can capture. If, for example, people have been spooked by the dire warnings of policy makers and significantly cut back their spending, the economy could be much worse in the next few quarters than the model is predicting.

Real housing prices are exogenous in the model, and the baseline scenario has prices continuing to drop slowly and stabilizing at about 5% below current values. I tried running the model with a bigger decline in housing prices (which creates a larger wealth effect in the model), but it didn't make much difference for the trajectory of the economy beyond a couple quarters down the line.

The model's forecast does make me wonder just for a moment if the dangers of a deep recession have been overstated. But I am fairly confident that the main reason the model doesn't forecast a more severe recession is that, reflecting the weaknesses of macro modeling, the model doesn't have a way of incorporating the "credit crunch" effect.

(Note that I'm not actually a macroeconomist, and this was first stab at tinkering with the Fair model, so take all my conclusions with a grain of salt.)

Still Celebrating

I keep thinking I should come up with something original to say about what to expect from Obamanomics going forward, but I've too busy savoring our victory. I was at the DC for Obama rooftop karaoke party last night, and everyone was just so joyous. And the inauguration is still to come! Here's one of many great videos from last Tuesday:

Keynes Lives in Beijing: U.S. vs. Chinese Stimulus Numbers

Like Yves Smith says, the Chinese stimulus package puts into context America's puny stimulus efforts thus far. Yves, however, confuses the numbers a bit by converting everything into dollars at PPP exchange rate. Much better to stick to thinking about this in terms of national currencies:

• The Chinese have announced plans to spend 4 trillion yuan for "transportation networks, ecology, technical innovation and post-disaster reconstruction" to stimulate their economy. That amounts to 16.2% of GDP (which was 24.67 trillion yuan in 2007).
• In contrast, the U.S. $150 billion package passed earlier to this year is equivalent to just 1.1% of GDP (which was $13.84 trillion in 2007).

Put in other terms, a U.S. stimulus of the same size as the Chinese package (proportional to GDP) would amount to $2.2 trillion.

That's the kind of rocket-powered stimulus we need! I would say that we could learn from the Chinese Keynesians, but Obama's team is already ready to roll with similar plans. It's great to see that all signs are that Obama is ignoring the New Hoovers and planning a "big bang" investment package. Job 1 right now is preventing what will be a severe recession from turning into a 2nd Great Depression, and it is absolutely not the time to be worried about short-run deficits.