2010 m. rugsėjo 30 d., ketvirtadienis

Martin Wolf apie makro aritmetiką

We can only cut debt by borrowing
September 26, 2010

“You can’t cut debt by borrowing.” How often have you read or heard this comment from “austerians” (a nice variant on “Austrians”), who complain about the huge fiscal deficits that have followed the financial crisis?

The obvious response is: so what? Shifting debt from people who cannot support it to those who can - the population at large, both now and in future - seems to make a great deal of sense if the alternative is an economic collapse that leads to a loss of output and investment now and so of income in the long term. Indeed, under the latter alternative, even the fiscal deficits may end up little, if any, smaller if one tries to slash them, as the UK could be about to discover.

Before leaping to that conclusion, however, let us approach the issue of de-leveraging - or debt reduction - analytically. Between 1994 and 2007, total US non-financial private debt rose from 118 per cent of gross domestic product to 173 per cent, the highest level in US history. Over the same period, US financial sector debt rose from 54 per cent of GDP to 115 per cent. A great deal of this leveraging up of the economy (matched elsewhere, notably in the UK) was based on false premises: borrowers and lenders thought that the assets against which they had borrowed would be worth more than turned out to be the case.

How, then, can people reduce their indebtedness or restore their net worth, after an unforeseen fall in asset prices? There are three mechanisms: sale; bankruptcy; and frugality. Let us consider each of these, in turn. But remember that, at the global level, debt cancels out: net debt is zero. So, in paying down debt, one is also reducing credit by an equal amount.

People with assets that they no longer wish to hold and debts they no longer wish to bear, can sell the former to repay the latter. If this is to cancel debt, then the ultimate purchaser needs to be a creditor. Sale makes this a voluntary transaction.

This path to de-leveraging is going to be part of the story. But when the predominant asset is housing, as it is now, the willingness of creditors to purchase will be limited. By and large, people who wish to buy houses are young and have limited liquid assets. Most creditors already own houses. In theory, houses could be sold to cash-rich foreigners. But that, too, is going to be a limited avenue for economy-wide deleveraging in most countries. (In Spain, however, sale to cash-rich foreigners seems a more plausible solution, since much of the past construction was designed for their use.)

The second approach is mass bankruptcy. In this case, creditors are forced to write down their loans to the value of the asset. That is clearly an important part of any de-leveraging. But since highly leveraged financial intermediaries stand between the ultimate creditors (households) and the ultimate debtors (other households), mass bankruptcy is going to wipe out the capital of intermediaries. That is likely to trigger panic, as losses cascade across the financial system.
Organising such a bankruptcy procedure, to allow for a mass adjustment of claims, is indeed one of the necessary conditions for managing a financial crisis efficiently. But it is going to be politically and technically complicated. In the end, however, a substantial part of the debt and the corresponding credit should be eliminated in this way. The big policy decision is how far the state wishes to socialise the losses of creditors. The answer will certainly include some socialisation, since governments insure deposits in financial institutions.

The third approach is repayment. Under any imaginable resolution of the debt overhang, some people are going to seek to pay down their loans. Indeed, a great many are going to try to do so: those who dislike the idea of bankruptcy, including the stigma; and those whose assets are worth not much less than their loans. To these groups of higher savers should be added those who are simply poorer than they thought they would be and so decide to save more.

While the highly indebted and the newly “asset-poor” have good reason to spend less than before the crisis, creditor households have no reason to spend more. Indeed, the collapse in interest rates in a slump lowers their incomes and so is quite likely to make them want to cut back on their spending, too. The aggregate effect of these changes in behaviour is, of course, a rise in the desired household rate and so the desired financial surplus of the household sector.

It is a matter of simple logic, that, since the financial balances of the household, corporate, government and foreign sectors must sum to zero, a rise in the surplus of the household sector must be offset by an offsetting move in other sectors.

During a post-crisis recession, the surplus of the corporate sector always rises, as it has done now, because managements slash investment. In the current crisis, increases in the surpluses of the non-financial corporate sector in high-income countries have been particularly large. In fact, non-financial corporate sectors were running substantial financial surpluses in the high-income countries before the crisis and are running still bigger surpluses now.

A shift in the foreign surplus means a shift towards surplus in the current account of the debt-burdened economy. That takes time. It also requires changes in the balance between saving and investment in the rest of the world. In practice, surplus countries do not want to make the adjustments needed to allow the US, UK and other former deficit countries run huge current account surpluses at full employment levels of income. So this way out is also largely blocked, alas.

When one has eliminated everything else, it turns out that the only sector both able and likely to offset a large move of the household sector towards financial surplus in a post-crisis slump is the government. Indeed, that is exactly what has happened.

My conclusion, then, is the exact opposite of the conventional wisdom with which I began: the only way that the private sector can de-leverage, when large economies are in a post-crisis recession, is for the government to leverage. The economy, as a whole, cannot de-leverage in any other way, other than via accelerated mass bankruptcy, which would certainly deepen the recession, if not create a depression. If the government tried to eliminate its deficit over night, it would have to drive the private sector back towards balance (or achieved a massive shift in the external balance very swiftly). In the context of excessive debt, that is only going to happen if private sector incomes are so squeezed that paying down their debt is no longer feasible. But in this situation, mass bankruptcy and a slump again becomes a likely outcome.

The latter is, indeed, what now threatens peripheral European countries forced to reduce fiscal deficits at exactly the time when their households are trying to pay down their debts and corporations are slashing investment. I fear the outcome of this hair-shirt policy, which is likely to break the will of some countries and, quite possibly, the eurozone itself.

So the least bad way to deal with a huge debt overhang has three elements: facilitate mass bankruptcy of the hopelessly over-indebted; lower interest rates, so making it easier for the indebted to carry and pay down their debt; and accept large fiscal deficits as a way of sustaining the incomes of those trying to pay down debts. The recommended alternative of slashing the fiscal deficit while the private sector tries to slash its debt suffers from a fallacy of composition: it is impossible for all sectors of the economy to spend less than income at the same time.

Of course, as this process proceeds, private debt should fall and public debt rise, relative to GDP. Is this a big problem? In some countries, the answer will be: yes. These countries will have to go through massive debt restructuring in the private and, quite possibly, public sectors. But other countries, notably the US, are perfectly able to run large fiscal deficits, financed, if necessary, by the central bank. At the end of this multi-year process of private sector debt restructuring and repayment, the private sector will be in balance once more and able and willing to spend. Meanwhile, the higher level of debt can be carried quite easily. So long as the real interest rate on government borrowing is not much above the real growth rate, stabilising the level of public debt to GDP does not even require a primary fiscal surplus.

Now, assume, that in this newly restored economy, the fiscal deficit is largely eliminated. Then, over time, the ratio of public debt to GDP can be brought down through the normal process of economic growth. Making structural changes in fiscal policy that control spending in the long run makes this more credible.

In short, not only can we deal with the private sector debt overhang by increasing the fiscal deficit, but we must do so. It is the only way of avoiding a deep slump and the immense disruption of mass bankruptcy. But this is not to preclude debt restructuring, as well. It is important to develop ways to restructure private debt, too. But, for this to happen, we must be prepared to impose more losses on financial intermediaries and so on their creditors.

Analysis of the economy is not the same thing as analysing a single household. What is true of the latter is not true of the former. The unwillingness to recognise this truth will lead to serious policy mistakes.

September 26, 2010

2010 m. rugsėjo 28 d., antradienis

Bernanke apie finansų krizės įtaką ekonomikos teorijai

Chairman Ben S. Bernanke
At the Conference Co-sponsored by the Center for Economic Policy Studies and the Bendheim Center for Finance, Princeton University, Princeton, New Jersey
September 24, 2010

Implications of the Financial Crisis for Economics

Thank you for giving me this opportunity to return to Princeton. It is good to be able to catch up with old friends and colleagues and to see both the changes and the continuities on campus. I am particularly pleased to see that the Bendheim Center for Finance is thriving. When my colleagues and I founded the center a decade ago, we intended it to be a place where students would learn about not only the technicalities of modern financial theory and practice but also about the broader economic context of financial activities. Recent events have made clear that understanding the role of financial markets and institutions in the economy, and of the effects of economic developments on finance, is more important than ever.

The financial crisis that began more than three years ago has indeed proved to be among the most difficult challenges for economic policymakers since the Great Depression. The policy response to this challenge has included important successes, most notably the concerted international effort to stabilize the global financial system after the crisis reached its worst point in the fall of 2008. For its part, the Federal Reserve worked closely with other policymakers, both domestically and internationally, to help develop the collective response to the crisis, and it played a key role in that response by providing backstop liquidity to a range of financial institutions as needed to stem the panic. The Fed also developed special lending facilities that helped to restore normal functioning to critical financial markets, including the commercial paper market and the market for asset-backed securities; led the bank stress tests in the spring of 2009 that significantly improved confidence in the U.S. banking system; and, in the area of monetary policy, took aggressive and innovative actions that helped to stabilize the economy and lay the groundwork for recovery.

Despite these and other policy successes, the episode as a whole has not been kind to the reputation of economic and economists, and understandably so. Almost universally, economists failed to predict the nature, timing, or severity of the crisis; and those few who issued early warnings generally identified only isolated weaknesses in the system, not anything approaching the full set of complex linkages and mechanisms that amplified the initial shocks and ultimately resulted in a devastating global crisis and recession. Moreover, although financial markets are for the most part functioning normally now, a concerted policy effort has so far not produced an economic recovery of sufficient vigor to significantly reduce the high level of unemployment. As a result of these developments, some observers have suggested the need for an overhaul of economics as a discipline, arguing that much of the research in macroeconomics and finance in recent decades has been of little value or even counterproductive.

Although economists have much to learn from this crisis, as I will discuss, I think that calls for a radical reworking of the field go too far. In particular, it seems to me that current critiques of economics sometimes conflate three overlapping yet separate enterprises, which, for the purposes of my remarks today, I will call economic science, economic engineering, and economic management. Economic science concerns itself primarily with theoretical and empirical generalizations about the behavior of individuals, institutions, markets, and national economies. Most academic research falls in this category. Economic engineering is about the design and analysis of frameworks for achieving specific economic objectives. Examples of such frameworks are the risk-management systems of financial institutions and the financial regulatory systems of the United States and other countries. Economic management involves the operation of economic frameworks in real time--for example, in the private sector, the management of complex financial institutions or, in the public sector, the day-to-day supervision of those institutions.

As you may have already guessed, my terminology is intended to invoke a loose analogy with science and engineering. Underpinning any practical scientific or engineering endeavor, such as a moon shot, a heart transplant, or the construction of a skyscraper are: first, fundamental scientific knowledge; second, principles of design and engineering, derived from experience and the application of fundamental knowledge; and third, the management of the particular endeavor, often including the coordination of the efforts of many people in a complex enterprise while dealing with myriad uncertainties. Success in any practical undertaking requires all three components. For example, the fight to control AIDS requires scientific knowledge about the causes and mechanisms of the disease (the scientific component), the development of medical technologies and public health strategies (the engineering applications), and the implementation of those technologies and strategies in specific communities and for individual patients (the management aspect). Twenty years ago, AIDS mortality rates mostly reflected gaps in scientific understanding and in the design of drugs and treatment technologies; today, the problem is more likely to be a lack of funding or trained personnel to carry out programs or to apply treatments.

With that taxonomy in hand, I would argue that the recent financial crisis was more a failure of economic engineering and economic management than of what I have called economic science. The economic engineering problems were reflected in a number of structural weaknesses in our financial system. In the private sector, these weaknesses included inadequate risk-measurement and risk-management systems at many financial firms as well as shortcomings in some firms' business models, such as overreliance on unstable short-term funding and excessive leverage. In the public sector, gaps and blind spots in the financial regulatory structures of the United States and most other countries proved particularly damaging. These regulatory structures were designed for earlier eras and did not adequately adapt to rapid change and innovation in the financial sector, such as the increasing financial intermediation taking place outside of regulated depository institutions through the so-called shadow banking system. In the realm of economic management, the leaders of financial firms, market participants, and government policymakers either did not recognize important structural problems and emerging risks or, when they identified them, did not respond sufficiently quickly or forcefully to address them. Shortcomings of what I have called economic science, in contrast, were for the most part less central to the crisis; indeed, although the great majority of economists did not foresee the near-collapse of the financial system, economic analysis has proven and will continue to prove critical in understanding the crisis, in developing policies to contain it, and in designing longer-term solutions to prevent its recurrence.

I don't want to push this analogy too far. Economics as a discipline differs in important ways from science and engineering; the latter, dealing as they do with inanimate objects rather than willful human beings, can often be far more precise in their predictions. Also, the distinction between economic science and economic engineering can be less sharp than my analogy may suggest, as much economic research has direct policy implications. And although I don't think the crisis by any means requires us to rethink economics and finance from the ground up, it did reveal important shortcomings in our understanding of certain aspects of the interaction of financial markets, institutions, and the economy as a whole, as I will discuss. Certainly, the crisis should lead--indeed, it is already leading--to a greater focus on research related to financial instability and its implications for the broader economy.

In the remainder of my remarks, I will focus on the implications of the crisis for what I have been calling economic science, that is, basic economic research and analysis. I will first provide a few examples of how economic principles and economic research, rather than having misled us, have significantly enhanced our understanding of the crisis and are informing the regulatory response. However, the crisis did reveal some gaps in economists' knowledge that should be remedied. I will discuss some of these gaps and suggest possible directions for future research that could ultimately help us achieve greater financial and macroeconomic stability.

How Economics Helped Us Understand and Respond to the Crisis
The financial crisis represented an enormously complex set of interactions--indeed, a discussion of the triggers that touched off the crisis and the vulnerabilities in the financial system and in financial regulation that allowed the crisis to have such devastating effects could more than fill my time this afternoon.1 The complexity of our financial system, and the resulting difficulty of predicting how developments in one financial market or institution may affect the system as a whole, presented formidable challenges. But, at least in retrospect, economic principles and research were quite useful for understanding key aspects of the crisis and for designing appropriate policy responses.

For example, the excessive dependence of some financial firms on unstable short-term funding led to runs on key institutions, with highly adverse implications for the functioning of the system as a whole. The fact that dependence on unstable short-term funding could lead to runs is hardly news to economists; it has been a central issue in monetary economics since Henry Thornton and Walter Bagehot wrote about the question in the 19th century.2 Indeed, the recent crisis bore a striking resemblance to the bank runs that figured so prominently in Thornton's and Bagehot's eras; but in this case, the run occurred outside the traditional banking system, in the shadow banking system--consisting of financial institutions other than regulated depository institutions, such as securitization vehicles, money market funds, and investment banks. Prior to the crisis, these institutions had become increasingly dependent on various forms of short-term wholesale funding, as had some globally active commercial banks. Examples of such funding include commercial paper, repurchase agreements (repos), and securities lending. In the years immediately before the crisis, some of these forms of funding grew especially rapidly; for example, repo liabilities of U.S. broker-dealers increased by a factor of 2-1/2 in the four years before the crisis, and a good deal of this expansion reportedly funded holdings of relatively less liquid securities.

In the historically familiar bank run during the era before deposit insurance, retail depositors who heard rumors about the health of their bank--whether true or untrue--would line up to withdraw their funds. If the run continued, then, absent intervention by the central bank or some other provider of liquidity, the bank would run out of the cash necessary to pay off depositors and then fail as a result. Often, the panic would spread as other banks with similar characteristics to, or having a financial relationship with, the one that had failed came under suspicion. In the recent crisis, money market mutual funds and their investors, as well as other providers of short-term funding, were the economic equivalent of early-1930s retail depositors. Shadow banks relied on these providers to fund longer-term credit instruments, including securities backed by subprime mortgages. After house prices began to decline, concerns began to build about the quality of subprime mortgage loans and, consequently, about the quality of the securities into which these and other forms of credit had been packaged. Although many shadow banks had limited exposure to subprime loans and other questionable credits, the complexity of the securities involved and the opaqueness of many of the financial arrangements made it difficult for investors to distinguish relative risks. In an environment of heightened uncertainty, many investors concluded that simply withdrawing funds was the easier and more prudent alternative. In turn, financial institutions, knowing the risks posed by a run, began to hoard cash, which dried up liquidity and significantly limited their willingness to extend new credit.3

Because the runs on the shadow banking system occurred in a historically unfamiliar context, outside the commercial banking system, both the private sector and the regulators insufficiently anticipated the risk that such runs might occur. However, once the threat became apparent, two centuries of economic thinking on runs and panics were available to inform the diagnosis and the policy response. In particular, in the recent episode, central banks around the world followed the dictum set forth by Bagehot in 1873: To avert or contain panics, central banks should lend freely to solvent institutions, against good collateral.4 The Federal Reserve indeed acted quickly to provide liquidity to the banking system, for example, by easing lending terms at the discount window and establishing regular auctions in which banks could bid for term central bank credit. Invoking emergency powers not used since the 1930s, the Federal Reserve also found ways to provide liquidity to critical parts of the shadow banking system, including securities dealers, the commercial paper market, money market mutual funds, and the asset-backed securities market. For today's purposes, my point is not to review this history but instead to point out that, in its policy response, the Fed was relying on well-developed economic ideas that have deep historical roots.5 The problem in this case was not a lack of professional understanding of how runs come about or how central banks and other authorities should respond to them. Rather, the problem was the failure of both private- and public-sector actors to recognize the potential for runs in an institutional context quite different than the circumstances that had given rise to such events in the past. These failures in turn were partly the result of a regulatory structure that had not adapted adequately to the rise of shadow banking and that placed insufficient emphasis on the detection of systemic risks, as opposed to risks to individual institutions and markets.

Economic research and analysis have proved useful in understanding many other aspects of the crisis as well. For example, one of the most important developments in economics over recent decades has been the flowering of information economics, which studies how incomplete information or differences in information among economic agents affect market outcomes.6 An important branch of information economics, principal-agent theory, considers the implications of differences in information between the principals in a relationship (say, the shareholders of a firm) and the agents who work for the principals (say, the firm's managers). Because the agent typically has more information than the principal--managers tend to know more about the firm's opportunities and problems than do the shareholders, for example--and because the financial interests of the principal and the agent are not perfectly aligned, much depends on the contract (whether explicit or implicit) between the principal and the agent, and, in particular, on the incentives that the contract provides the agent.

Poorly structured incentives were pervasive in the crisis. For example, compensation practices at financial institutions, which often tied bonuses to short-term results and made insufficient adjustments for risk, contributed to an environment in which both top managers and lower-level employees, such as traders and loan officers, took excessive risks. Serious problems with the structure of incentives also emerged in the application of the so-called originate-to-distribute model to subprime mortgages. To satisfy the strong demand for securitized products, both mortgage lenders and those who packaged the loans for sale to investors were compensated primarily on the quantity of "product" they moved through the system. As a result, they paid less attention to credit quality and many loans were made without sufficient documentation or care in underwriting. Conflicts of interest at credit agencies, which were supposed to serve investors but had incentives to help issuers of securities obtain high credit ratings, are another example.

Consistent with key aspects of research in information economics, the public policy responses to these problems have focused on improving market participants' incentives. For example, to address problems with compensation practices, the Federal Reserve, in conjunction with other supervisory agencies, has subjected compensation practices of banking institutions to supervisory review. The interagency supervisory guidance supports compensation practices that induce employees to take a longer-term perspective, such as paying part of employees' compensation in stock that vests based on sustained strong performance. To ameliorate the problems with the originate-to-distribute model, recent legislation requires regulatory agencies, including the Federal Reserve, to develop new standards applicable to securitization activities that would better align the incentives faced by market participants involved in the various stages of the securitization process.7 And the Securities and Exchange Commission has been charged with developing new rules to reduce conflicts of interest at credit rating agencies.

Information economics and principal-agent theory are also essential to understanding the problems created by so-called too-big-to-fail financial institutions. Prior to the crisis, market participants believed that large, complex, and interconnected financial firms would not be allowed to fail during a financial crisis. And, as you know, authorities both in the United States and abroad did in fact intervene on a number of occasions to prevent the failure of such firms--not out of any special consideration for the owners, managers, or creditors of these firms, but because of legitimate concerns about potential damage to the financial system and the broader economy. However, although the instability caused by the failure or near-failure of some large firms did indeed prove very costly, in some sense the real damage was done before the crisis. If creditors in good times believe that certain firms will not be allowed to fail, they will demand relatively little compensation for risk, thus weakening market discipline; in addition, creditors will not have much incentive to monitor the firms' risk-taking. As a result, as predicted by principal-agent theory, firms thought to be too big to fail tended to take on more risk, as they faced little pressure from investors and expected to receive assistance if their bets went bad. This problem is an example of what economists refer to as moral hazard. The resulting buildup of risk in too-big-to-fail firms increased the likelihood that a financial crisis would occur and worsened the crisis when it did occur.

One response to excessive risk-taking is stronger oversight by regulators, and the recent legislation and the rules and procedures being developed by the Federal Reserve and other agencies will subject systemically critical firms to tougher regulatory requirements and stricter supervision. The Federal Reserve has also been involved in international negotiations to raise the capital and liquidity that banks are required to hold. However, the problem of too-big-to-fail can only be eliminated when market participants believe authorities' statements that they will not intervene to prevent failures. If creditors believe that the government will not rescue firms when their bets go bad, then creditors will have more-appropriate incentives to price, monitor, and limit the risk-taking of the firms to which they lend. The best way to achieve such credibility is to create institutional arrangements under which a failure can be allowed to occur without widespread collateral damage; if failures can take place more safely, the authorities will no longer have an incentive to try to avoid them. The financial reform legislation took an important step in this direction by creating a resolution regime under which large, complex financial firms can be placed in receivership, but which also gives the government the flexibility to take the actions needed to safeguard systemic stability. This new regime should help restore market discipline by putting a greater burden on creditors and counterparties to monitor the risk-taking of large financial firms.

The insights of economists proved valuable to policymakers in many other contexts as well: in the setting and oversight of bank capital standards, in the decision to provide the market with extensive information gleaned during the bank stress tests in the spring of 2009, in the design of the Fed's liquidity facilities for nondepository institutions, in the analysis of the collapse of the securitization market, and in the measures taken to protect consumers from deceptive or inappropriate lending, to name a few. Many of the key ideas, like those of Thornton and Bagehot, were quite old, but some reflected relatively recent research. For example, recent work on monetary policy helped the Federal Reserve provide further policy accommodation despite the constraints imposed by the zero lower bound on interest rates.8

Economics and Economic Research in the Wake of the Crisis
Economic principles and research have been central to understanding and reacting to the crisis. That said, the crisis and its lead up also challenged some important economic principles and research agendas. I will briefly indicate some areas that, I believe, would benefit from more attention from the economics profession.

Most fundamentally, and perhaps most challenging for researchers, the crisis should motivate economists to think further about their modeling of human behavior. Most economic researchers continue to work within the classical paradigm that assumes rational, self-interested behavior and the maximization of "expected utility"--a framework based on a formal description of risky situations and a theory of individual choice that has been very useful through its integration of economics, statistics, and decision theory.9 An important assumption of that framework is that, in making decisions under uncertainty, economic agents can assign meaningful probabilities to alternative outcomes. However, during the worst phase of the financial crisis, many economic actors--including investors, employers, and consumers--metaphorically threw up their hands and admitted that, given the extreme and, in some ways, unprecedented nature of the crisis, they did not know what they did not know. Or, as Donald Rumsfeld might have put it, there were too many "unknown unknowns." The profound uncertainty associated with the "unknown unknowns" during the crisis resulted in panicky selling by investors, sharp cuts in payrolls by employers, and significant increases in households' precautionary saving.

The idea that, at certain times, decisionmakers simply cannot assign meaningful probabilities to alternative outcomes--indeed, cannot even think of all the possible outcomes--is known as Knightian uncertainty, after the economist Frank Knight who discussed the idea in the 1920s. Although economists and psychologists have long recognized the challenges such ambiguity presents and have analyzed the distinction between risk aversion and ambiguity aversion, much of this work has been abstract and relatively little progress has been made in describing and predicting the behavior of human beings under circumstances in which their knowledge and experience provide little useful information.10 Research in this area could aid our understanding of crises and other extreme situations. I suspect that progress will require careful empirical research with attention to psychological as well as economic factors.

Another issue that clearly needs more attention is the formation and propagation of asset price bubbles. Scholars did a great deal of work on bubbles after the collapse of the dot-com bubble a decade ago, much of it quite interesting, but the profession seems still quite far from consensus and from being able to provide useful advice to policymakers. Much of the literature at this point addresses how bubbles persist and expand in circumstances where we would generally think they should not, such as when all agents know of the existence of a bubble or when sophisticated arbitrageurs operate in a market. As it was put by my former colleague, Markus Brunnermeier, a scholar affiliated with the Bendheim center who has done important research on bubbles, "We do not have many convincing models that explain when and why bubbles start."11 I would add that we also don't know very much about how bubbles stop either, and better understanding this process--and its implications for the household, business, and financial sectors--would be very helpful in the design of monetary and regulatory policies.

Another issue brought to the fore by the crisis is the need to better understand the determinants of liquidity in financial markets. The notion that financial assets can always be sold at prices close to their fundamental values is built into most economic analysis, and before the crisis, the liquidity of major markets was often taken for granted by financial market participants and regulators alike. The crisis showed, however, that risk aversion, imperfect information, and market dynamics can scare away buyers and badly impair price discovery. Market illiquidity also interacted with financial panic in dangerous ways. Notably, a vicious circle sometimes developed in which investor concerns about the solvency of financial firms led to runs: To obtain critically needed liquidity, firms were forced to sell assets quickly, but these "fire sales" drove down asset prices and reinforced investor concerns about the solvency of the firms. Importantly, this dynamic contributed to the profound blurring of the distinction between illiquidity and insolvency during the crisis. Studying liquidity and illiquidity is difficult because it requires going beyond standard models of market clearing to examine the motivations and interactions of buyers and sellers over time.12 However, with regulators prepared to impose new liquidity requirements on financial institutions and to require changes in the operations of key markets to ensure normal functioning in times of stress, new policy-relevant research in this area would be most welcome.

I have been discussing needed research in microeconomics and financial economics but have not yet touched on macroeconomics. Standard macroeconomic models, such as the workhorse new-Keynesian model, did not predict the crisis, nor did they incorporate very easily the effects of financial instability. Do these failures of standard macroeconomic models mean that they are irrelevant or at least significantly flawed? I think the answer is a qualified no. Economic models are useful only in the context for which they are designed. Most of the time, including during recessions, serious financial instability is not an issue. The standard models were designed for these non-crisis periods, and they have proven quite useful in that context. Notably, they were part of the intellectual framework that helped deliver low inflation and macroeconomic stability in most industrial countries during the two decades that began in the mid-1980s.

That said, understanding the relationship between financial and economic stability in a macroeconomic context is a critical unfinished task for researchers. Earlier work that attempted to incorporate credit and financial intermediation into the study of economic fluctuations and the transmission of monetary policy represents one possible starting point. To give an example that I know particularly well, much of my own research as an academic (with coauthors such as Mark Gertler and Simon Gilchrist) focused on the role of financial factors in propagating and amplifying business cycles. Gertler and Nobuhiro Kiyotaki have further developed that basic framework to look at the macroeconomic effects of financial crises.13 More generally, I am encouraged to see the large number of recent studies that have incorporated banking and credit creation in standard macroeconomic models, though most of this work is still some distance from capturing the complex interactions of risk-taking, liquidity, and capital in our financial system and the implications of these factors for economic growth and stability.14

It would also be fruitful, I think, if "closed-economy" macroeconomists would look more carefully at the work of international economists on financial crises. Drawing on the substantial experience in emerging market economies, international economists have examined the origins and economic effects of banking and currency crises in some detail. They have also devoted considerable research to the international contagion of financial crises, a related topic that is of obvious relevance to our recent experience.

Finally, macroeconomic modeling must accommodate the possibility of unconventional monetary policies, a number of which have been used during the crisis. Earlier work on this topic relied primarily on the example of Japan; now, a number of data points can be used. For example, the experience of the United States and the United Kingdom with large-scale asset purchases could be explored to improve our understanding of the effects of such transactions on longer-term yields and how such effects can be incorporated into modern models of the term structure of interest rates.15

I began my remarks by drawing the distinction between the scientific, engineering, and management aspects of economics. For the most part, in my view, the financial crisis reflected problems in what I referred to as economic engineering and economic management. Both private-sector arrangements (for example, for risk management and funding) and the financial regulatory framework were flawed in design and execution, and these weaknesses were the primary reasons that the financial crisis and its economic effects were so severe.

Disasters require urgent action to prevent repetition. Engineers seek to enhance the reliability of a complex machine through improvements in basic design; more-rigorous testing and quality assurance; and increases in the resilience of the machine through means such as stronger materials, greater redundancy, and better backup systems. Economic policymakers' efforts to avoid, or at least mitigate, future financial crises are proceeding along analogous lines. First, the recent reform legislation has improved the design of the regulatory framework, closing important gaps such as the lack of oversight of the shadow banking system. Likewise, in the private sector, firms have taken significant steps to improve their systems for managing risk and liquidity. Second, to reduce the probability and severity of future crises, policymakers will monitor the system more intensively. For example, the recent legislation creates a Financial Stability Oversight Council, made up of the heads of the financial regulatory agencies, which will assess potential risks to the financial system, identify regulatory gaps, and coordinate the efforts of the various agencies. Enhanced market discipline, the result of a new resolution regime for systemically critical firms and a number of measures to increase transparency, will complement regulatory oversight. Finally, numerous steps, both prescribed in the legislation and taken independently by regulators, will work to make our financial system more resilient to shocks. Examples include rules that will strengthen key financial utilities, toughen bank capital and liquidity standards, and require that more derivatives instruments be standardized and traded on exchanges rather than over the counter.

Economic engineering is effective only in combination with good economic management. For its part, the Federal Reserve has revamped its supervisory operations to provide more effective and comprehensive oversight. In particular, we are taking an approach that is both more multi-disciplinary--making greater use of the Federal Reserve's wide expertise in macroeconomics, finance, and other fields to complement the work of bank supervisors; and more macroprudential--that is, focused on risks to the system as a whole as well as those to individual institutions. Together, better design of private- and public-sector frameworks for managing risk, better monitoring and supervision, and a more resilient financial system do not by any means guarantee that financial crises will not recur, but they should both reduce the risk of crises and mitigate the effects of any that do happen.

In short, the financial crisis did not discredit the usefulness of economic research and analysis by any means; indeed, both older and more recent ideas drawn from economic research have proved invaluable to policymakers attempting to diagnose and respond to the financial crisis. However, the crisis has raised some important questions that are already occupying researchers and should continue to do so. As I have discussed today, more work is needed on the behavior of economic agents in times of profound uncertainty; on asset price bubbles and the determinants of market liquidity; and on the implications of financial factors, including financial instability, for macroeconomics and monetary policy. Much of that work is already under way at the Bendheim center and in the Department of Economics here at Princeton.


1. For a more comprehensive discussion of vulnerabilities and triggers during the financial crisis, see Ben S. Bernanke (2010), "Causes of the Recent Financial and Economic Crisis," testimony before the Financial Crisis Inquiry Commission, September 2. Return to text

2. See Henry Thornton ([1802] 1962), An Enquiry into the Nature and Effects of the Paper Credit of Great Britain (New York: A. M. Kelley); and Walter Bagehot ([1873] 1897), Lombard Street: A Description of the Money Market (New York: Charles Scribner's Sons). A discussion relating the Federal Reserve's policy actions during the financial crisis to the ideas of Bagehot is contained in Brian F. Madigan (2009), "Bagehot's Dictum in Practice: Formulating and Implementing Policies to Combat the Financial Crisis," speech delivered at "Financial Stability and Macroeconomic Policy," a symposium sponsored by the Federal Reserve Bank of Kansas City, held in Jackson Hole, Wyo., August 20-22. See also Ben S. Bernanke (2008), "Liquidity Provision by the Federal Reserve," speech delivered at the Federal Reserve Bank of Atlanta Financial Markets Conference (via satellite), held in Sea Island, Ga., May 13. Return to text

3. See Gary B. Gorton (2008), "The Panic of 2007," paper presented at "Maintaining Stability in a Changing Financial System," a symposium sponsored by the Federal Reserve Bank of Kansas City, held in Jackson Hole, Wyo., August 21-23. Also see Markus K. Brunnermeier (2009), "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, vol. 23 (Winter), pp. 77-100. Return to text

4. Bagehot also suggested that "these loans should only be made at a very high rate of interest" (Lombard Street, p. 99; see note 2). Some modern commentators have rationalized Bagehot's dictum to lend at a high or "penalty" rate as a way to mitigate moral hazard--that is, to help maintain incentives for private-sector banks to provide for adequate liquidity in advance of any crisis. However, the risk of moral hazard did not appear to be Bagehot's principal motivation for recommending a high rate; rather, he saw it as a tool to dissuade unnecessary borrowing and thus help protect the Bank of England's own finite store of liquid assets. See Bernanke, "Liquidity Provision," in note 2 for further documentation. Today, potential limitations on the central bank's lending capacity are not nearly so pressing an issue as in Bagehot's time, when the central bank's ability to provide liquidity was far more tenuous. Generally, the Federal Reserve lent at rates above the "normal" rate for the market but lower than the rate prevailing in distressed and illiquid markets. This strategy provided needed liquidity while encouraging borrowers to return to private markets when conditions normalized. Return to text

5. A substantial modern literature has updated and formalized many of the insights of Bagehot and Thornton. A classic example is Douglas W. Diamond and Philip H. Dybvig (1983), "Bank Runs, Deposit Insurance, and Liquidity" Journal of Political Economy, vol. 91 (3), pp. 401-19. Return to text

6. George Akerlof, A. Michael Spence, and Joseph Stiglitz shared the 2001 Nobel Prize in Economics for their leadership in the development of information economics. Return to text

7. The requirements related to credit risk were contained in section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203 (July 2010); with regard to compensation practices, see Board of Governors of the Federal Reserve System (2009), "Federal Reserve Issues Proposed Guidance on Incentive Compensation," press release, October 22; also see Board of Governors of the Federal Reserve System (2010), "Federal Reserve, OCC, OTS, FDIC Issue Final Guidance on Incentive Compensation," joint press release, June 21.

Why might government intervention be needed to improve private-sector incentives, when incentives presumably exist for the private-sector principals and agents to work out the best incentive structure for themselves? The possibility of problems arising regarding collective action when a firm has many shareholders is one rationale. The standard reason for intervening in banks' risk-taking practices is the existence of deposit insurance, which itself distorts private risk-taking incentives by eliminating any incentive of depositors to monitor the activities of their bank; for an early discussion, see John Kareken and Neil Wallace (1978), "Deposit Insurance and Bank Regulation: A Partial-Equilibrium Exposition," Journal of Business, vol. 51 (July), pp. 413-38. Indeed, the Federal Reserve invoked a "safety and soundness" rationale for its guidance on incentive compensation practices. More generally, as the crisis revealed, bad incentives can lead to problems that affect not just the individuals involved but the broader financial system as well; such spillovers suggest that regulation can help improve outcomes. Return to text

8. The Federal Reserve did so by, for example, (1) acting rapidly when confronted with the zero lower bound, as discussed in David Reifschneider and John C. Williams (2000), "Three Lessons for Monetary Policy in a Low-Inflation Era," Journal of Money, Credit and Banking, vol. 32 (November), pp. 936-66; (2) providing forward guidance regarding short-term interest rates, as discussed in Gauti Eggertsson and Michael Woodford (2003), "The Zero Bound on Interest-Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, vol. 2003 (1), pp. 139-211; and (3) expanding the Federal Reserve's balance sheet through purchases of longer-term securities, as discussed in Ben S. Bernanke, Vincent R. Reinhart, and Brian P. Sack (2004), "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Brookings Papers on Economic Activity, vol. 2004 (2), pp. 1-78. Return to text

9. Herein I use the extension of Von Neumann-Morgenstern expected utility, which focused on objective probabilities over risks, to situations in which individuals assign subjective probabilities over risks. For a review of some classic contributions in this area, see Jacques H. Drèze (1974), "Axiomatic Theories of Choice, Cardinal Utility and Subjective Probability: A Review," in Jacques H. Drèze, ed., Allocation under Uncertainty: Equilibrium and Optimality (London: Macmillan), pp. 3-23. Some authors have used risk to refer to a situation of objective probabilities and uncertainty to refer to a situation of subjective probabilities (see, for example, David M. Kreps (1990), A Course in Microeconomic Theory (Princeton, N.J.: Princeton University Press)). As highlighted below, others refer to uncertainty as a situation in which subjective probabilities cannot be assessed. As this discussion makes clear, it is probably best to focus on the context in which the terms risk and uncertainty are used. Return to text

10. The classic reference on ambiguity aversion is due to Daniel Ellsberg (1961), "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, vol. 75 (4), pp. 643-69; for a more recent, and abstract, theoretical treatment, see Larry G. Epstein (1999), "A Definition of Uncertainty Aversion," Review of Economic Studies, vol. 66 (July), pp. 579-608. Return to text

11. See Markus K. Brunnermeier (2008), "Bubbles," in Steven N. Durlauf and Lawrence E. Blume, eds., The New Palgrave Dictionary of Economics, 2nd ed. (New York: Palgrave Macmillan). Return to text

12. Good work has been done in this area; see, for example, Franklin Allen, Elena Carletti, Jan P. Krahnen, and Marcel Tyrell, eds. (forthcoming), Liquidity and Crises (New York: Oxford University Press). Return to text

13. See Mark Gertler and Nobuhiro Kiyotaki (forthcoming), Handbook of Monetary Economics (482 KB PDF) Return to text

14. See, for example, Marvin Goodfriend and Bennett T. McCallum (2007), "Banking and Interest Rates in Monetary Policy Analysis: A Quantitative Exploration," Journal of Monetary Economics, vol. 54 (5), pp.1480-1507; and Lawrence J. Christiano, Roberto Motto, and Massimo Rostagno (2009), "Financial Factors in Economic Fluctuations," paper presented at "Financial Markets and Monetary Policy," a conference sponsored by the Federal Reserve Board and the Journal of Money, Credit and Banking, held in Washington, June 4-5. For examples of studies that emphasize bank capital as a constraint on financial intermediation, see Skander J. Van den Heuvel (2008), "The Welfare Cost of Bank Capital Requirements," Journal of Monetary Economics, vol. 55 (March), pp. 298-320; Césaire A. Meh and Kevin Moran (2008), "The Role of Bank Capital in the Propagation of Shocks," Bank of Canada Working Paper 2008-36 (Ottawa, Ontario, Canada: Bank of Canada, October); and Mark Gertler and Peter Karadi (2009), "A Model of Unconventional Monetary Policy," manuscript, New York University, June. Return to text

15. An example of recent research on this subject is: Joseph Gagnon, Matthew Raskin, Julie Remache, and Brian Sack (2010), "Large-Scale Asset Purchases by the Federal Reserve: Did They Work?" Staff Report no. 441 (New York: Federal Reserve Bank of New York, March). See also Gertler and Karadi (2009), footnote 14. Return to text

2010 m. rugsėjo 21 d., antradienis

Krugmanas apie "aukojimąsi"

The Angry Rich
September 19, 2010, www.nytimes.com

Anger is sweeping America. True, this white-hot rage is a minority phenomenon, not something that characterizes most of our fellow citizens. But the angry minority is angry indeed, consisting of people who feel that things to which they are entitled are being taken away. And they’re out for revenge.

No, I’m not talking about the Tea Partiers. I’m talking about the rich.

These are terrible times for many people in this country. Poverty, especially acute poverty, has soared in the economic slump; millions of people have lost their homes. Young people can’t find jobs; laid-off 50-somethings fear that they’ll never work again.

Yet if you want to find real political rage — the kind of rage that makes people compare President Obama to Hitler, or accuse him of treason — you won’t find it among these suffering Americans. You’ll find it instead among the very privileged, people who don’t have to worry about losing their jobs, their homes, or their health insurance, but who are outraged, outraged, at the thought of paying modestly higher taxes.

The rage of the rich has been building ever since Mr. Obama took office. At first, however, it was largely confined to Wall Street. Thus when New York magazine published an article titled “The Wail Of the 1%,” it was talking about financial wheeler-dealers whose firms had been bailed out with taxpayer funds, but were furious at suggestions that the price of these bailouts should include temporary limits on bonuses. When the billionaire Stephen Schwarzman compared an Obama proposal to the Nazi invasion of Poland, the proposal in question would have closed a tax loophole that specifically benefits fund managers like him.

Now, however, as decision time looms for the fate of the Bush tax cuts — will top tax rates go back to Clinton-era levels? — the rage of the rich has broadened, and also in some ways changed its character.

For one thing, craziness has gone mainstream. It’s one thing when a billionaire rants at a dinner event. It’s another when Forbes magazine runs a cover story alleging that the president of the United States is deliberately trying to bring America down as part of his Kenyan, “anticolonialist” agenda, that “the U.S. is being ruled according to the dreams of a Luo tribesman of the 1950s.” When it comes to defending the interests of the rich, it seems, the normal rules of civilized (and rational) discourse no longer apply.

At the same time, self-pity among the privileged has become acceptable, even fashionable.

Tax-cut advocates used to pretend that they were mainly concerned about helping typical American families. Even tax breaks for the rich were justified in terms of trickle-down economics, the claim that lower taxes at the top would make the economy stronger for everyone.

These days, however, tax-cutters are hardly even trying to make the trickle-down case. Yes, Republicans are pushing the line that raising taxes at the top would hurt small businesses, but their hearts don’t really seem in it. Instead, it has become common to hear vehement denials that people making $400,000 or $500,000 a year are rich. I mean, look at the expenses of people in that income class — the property taxes they have to pay on their expensive houses, the cost of sending their kids to elite private schools, and so on. Why, they can barely make ends meet.

And among the undeniably rich, a belligerent sense of entitlement has taken hold: it’s their money, and they have the right to keep it. “Taxes are what we pay for civilized society,” said Oliver Wendell Holmes — but that was a long time ago.

The spectacle of high-income Americans, the world’s luckiest people, wallowing in self-pity and self-righteousness would be funny, except for one thing: they may well get their way. Never mind the $700 billion price tag for extending the high-end tax breaks: virtually all Republicans and some Democrats are rushing to the aid of the oppressed affluent.

You see, the rich are different from you and me: they have more influence. It’s partly a matter of campaign contributions, but it’s also a matter of social pressure, since politicians spend a lot of time hanging out with the wealthy. So when the rich face the prospect of paying an extra 3 or 4 percent of their income in taxes, politicians feel their pain — feel it much more acutely, it’s clear, than they feel the pain of families who are losing their jobs, their houses, and their hopes.

And when the tax fight is over, one way or another, you can be sure that the people currently defending the incomes of the elite will go back to demanding cuts in Social Security and aid to the unemployed. America must make hard choices, they’ll say; we all have to be willing to make sacrifices.

But when they say “we,” they mean “you.” Sacrifice is for the little people.

2010 m. rugsėjo 13 d., pirmadienis

Greitis ir finansai

What can be done to slow high-frequency trading?
By Gillian Tett
Published: September 9 2010 17:36 | Last updated: September 9 2010 17:36

Would it be possible to impose a speed limit on high-frequency trading? That is the question currently hovering in the air, after Mary Schapiro, chairman of the Securities and Exchange Commission, warned this week in New York that the SEC is planning new controls following the May 6 “flash crash”.

But as the debate intensifies about hyper-fast equity trades, investors and policymakers would do well to remember another point. As a fascinating paper from Andy Haldane, an official at the Bank of England* points, what makes the flash crash interesting is that it was not an isolated incident: on the contrary, it epitomises, in an extreme form, a bigger problem of speed in modern finance.

And while this “speed” issue has not garnered much attention in recent years – partly because most observers assumed that speed was good – it seems that a debate is long overdue. Not only does the financial system seem to have sped up dramatically in recent years, but this trend has caused destabilisation in ways that go well beyond the “flash crash”.

The key issue at stake, Mr Haldane argues, lies not so much with computer models, but issues of human behaviour. More specifically, he points out, neurological research suggests that the human brain has two contradictory instincts: part of it is hard-wired to chase instant gratification; however, another part of our brain also has the ability to be “patient”, and delay immediate gratification for future gains.

Now, one might have expected that during the course of evolution, humans would have moved from impatience to patience. However, Mr Haldane suggests this is not necessarily the case as far as finance is concerned.

On paper, most of the financial innovations in the past two centuries could – theoretically – have encouraged greater patience. The creation of liquid and deep markets, for example, has enabled pools of capital to be deployed to promote long-term investment. Similarly, as corporate transparency has risen and information technology improved this has offered investors the ability to take well-informed, long-term decisions – if they choose.

But in practice innovation also has a darker, impatient side too: as markets have become deeper, and more liquid, that has enabled trading to become more frenetic; similarly, as information has become more frequently available, this has encouraged skittish, herd behaviour.

Thus investors are increasingly demanding quicker returns. Equity churning has grown: whereas the average holding period for US equity holdings was around seven years in the 1970s, it is now nearer to seven months.

That appears to have promoted more market volatility: though equity prices were twice as volatile as fundamentals back in the 1960s, they have become between six and 10 times more volatile since 1990, with numerous miscorrelations. And that in turn, has created a bitter irony, Mr Haldane argues: namely that while most of western society has long assumed that speed was tantamount to progress and efficiency, in truth these rising levels of speed, impatience – and short-termism – might have actually made the system less efficient, and rational than before.

Now, that conclusion will not come as a surprise to any investors who experienced the “flash crash” on May 6. Nor will it surprise anyone who has ever read a western lifestyle magazine; these typically rail against the way that life is “speeding up” in all manner of spheres. But the question for an institution such as the Bank of England, or any other regulator, is whether anything can be done about this issue of speed; other than simply taking a luddite sledgehammer to computers?

Some vague ideas are now floating around. Lord Turner, head of the UK’s Financial Services Authority, is one of those who has floated the idea of introducing a “tobin tax”, or a tax on trading, to curb frenetic churn. Mr Haldane, for his part, suggests policymakers might introduce incentives to promote long-term investments, such as giving more voting power to shareholders who retain equity stakes for a long period.

Ms Schapiro, for her part, raised another, more limited proposal this week: in a speech in New York, she indicated that the SEC is considering introducing a minimum “time in force” for orders, to stop high-frequency traders from frenetically canceling deals.

However, while Lord Turner and Mr Haldane’s ideas seem quite sensible, they stand little chance of flying anytime soon. Meanwhile, the Schapiro proposal barely scratches the surface of the problem. To my mind, the real question which needs to be discussed – but which regulators are still ducking – is why ultra-fast trading is needed at all? What is actually gained by having deals struck at “one thousandth of a second”, as Ms Schapiro says? I would be interested to see some convincing answers.

*Patience and Finance; Andrew Haldane, Bank of England. 9 September

Basel III

Regulators Back New Bank Rules to Avert Crises
Published: September 12, 2010, www.nytimes.com

BASEL, Switzerland — The world’s top bank regulators agreed Sunday on far-reaching new rules intended to make the global banking industry safer and protect international economies from future financial disasters.

The new requirements will more than triple the amount of capital that banks must hold in reserve, an effort to move banks toward more conservative positions and force them to maintain a larger cushion against potential losses. They come two years after the collapse of Lehman Brothers set off a worldwide banking crisis that required billions in government bailouts.

The centerpiece of the agreement is a measure that requires banks to raise the amount of common equity they hold — considered the least risky form of capital — to 7 percent of assets from 2 percent. Together with other requirements intended to safeguard against risk, it could significantly alter the way banks do business.

Banks have warned that the new regulations could reduce profits, strain weaker institutions and raise the cost of borrowing. But regulators provided a lengthy transition period to give banks time to adjust — the better part of the decade for some of the strictest rules.

“The agreements reached today are a fundamental strengthening of global capital standards,” Jean-Claude Trichet, president of the European Central Bank and chairman of the group, which included financial officials from 27 countries.

While some banking groups have claimed the rules will require them to curtail credit and cripple economic growth, Mr. Trichet took the opposite view, saying in a statement that the rules’ “contribution to long-term financial stability and growth will be substantial.”

Others said that the modest effect on growth or borrowing costs was a small price to pay for a less combustible financial system.

“It will make banks less profitable, probably,” said Joe Peek, professor of international banking and financial economics at the University of Kentucky. “But it will make the system safer, because there will be more of a cushion from insolvency, so banks can withstand more of a hit and still walk away alive.”

The recommendations by the group, which includes Ben S. Bernanke, chairman of the Federal Reserve, are subject to approval in November by the G-20 nations and then enactment by individual nations before they become binding. The group set a deadline of Jan. 1, 2013, for member nations to begin to phase in the rules, known as Basel III.

Some bankers expressed support for the new regulations. “Banks will unarguably be safer institutions,” said Anders Kvist, head of group treasury at SEB, a bank based in Stockholm that has operations throughout Europe.

Many banks, however, have warned that the new rules would tighten the credit available to borrowers.

“This high capital level will decrease the ability of banks to lend,” said Scott E. Talbott of the Financial Services Roundtable, which represents the largest American banks.

While the new regulations require a substantial increase in capital reserves, they are not as severe as some analysts had predicted. Officials who participated in the meetings said the United States would have liked even stricter capital requirements and a shorter transition time, but were satisfied that this was an effective accord that could attract international support.

“It was not that hard,” one American official said.

The group, the Basel Committee on Banking Supervision, stuck with its plans to oblige banks to protect themselves when they engaged in non-banking activities or made investments in instruments that were not on their balance sheets.

This provision, called a leverage ratio, is an attempt to require banks to hold reserves against all their money at risk, with no leeway to play games with accounting rules.

The 7 percent common equity requirement includes a 2.5 percent buffer that banks could draw down in times of crisis. But if they dipped into that money they would face restrictions on how much they could pay executives or distribute to shareholders.

Common equity is the amount of money that shareholders have invested in a company’s stock, as well as profits that are not paid as dividends. The new minimum requirement for reserves refers to the amount of these conservative assets banks must hold in relation to so-called risk-weighted assets.

Some countries were pushing for an additional buffer of 2.5 percent, for a total of 9.5 percent, to be imposed in good times but when there were signs of economic overheating. But the Basel group could not agree on the measure and left it up to individual countries whether to adopt it.

The rules would be phased in gradually to give banks plenty of time to adjust, with some provisions not taking full effect until the beginning of 2019. Banks would have to begin raising their common equity levels in 2013.

A representative for the American Bankers Association, a trade group for the country’s 8,000 banks, expressed satisfaction on Sunday that the group’s concerns had been addressed. “Banks understand the need for heightened prudential standards,” said Mary Frances Monroe, vice president for regulatory policy at the association.

Regulators left open the possibility that they might still impose stricter rules on “systemically important” banks, institutions whose problems could spread throughout the financial system.

The three top American banking regulators — the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency — issued a joint statement saying the accord “represents a significant step forward in reducing the incidence and severity of future financial crises.”

But while the United States is expected to adopt the reforms, they could be diluted as they are codified into law by other nations. “Every country is going to face pressure from its banking industry to interpret the rules in a way that favors their banks,” said David Andrew Singer, a political scientist at the Massachusetts Institute of Technology.

In a nod to Germany’s public-sector landesbanks, which had predicted they might need to raise 50 billion euros ($63 billion) to comply with the new rules, the Basel group allowed banks to continue to apply government bailout money toward capital reserves through the end of 2017.

Some banks may face market pressure to stock up on capital sooner, and the rules could encourage weaker banks in the United States and elsewhere to merge with stronger partners. But the effect may be less than feared because many banks have already increased their reserves in anticipation of the new rules or are planning to do so.

Deutsche Bank in Frankfurt said on Sunday that it would sell shares worth 9.8 billion euros beginning at the end of this month, primarily to finance the acquisition of Deutsche Postbank, a German retail bank, but also to bolster its reserves.

Other European banks that may need to raise money include Société Générale in France and Lloyds in Britain as well as Deutsche Bank, according to calculations by Morgan Stanley made before the new rules were announced.

Banks that have already increased capital, like SEB and UBS in Switzerland, will be better placed and may be able to pay out profits to shareholders.

The rules also include provisions intended to make the financial world more transparent, for example, giving banks incentives to trade exotic derivatives on open markets rather than secretly between institutions. They would also will tighten how common equity and risk-weighting are defined to prevent banks from looking for loopholes.

Jack Ewing reported from Basel, Switzerland, and Sewell Chan from Washington.

Thomas L. Friedman apie vertybių kaitą JAV

We’re No. 1(1)!
Published: September 11, 2010

I want to share a couple of articles I recently came across that, I believe, speak to the core of what ails America today but is too little discussed. The first was in Newsweek under the ironic headline “We’re No. 11!” The piece, by Michael Hirsh, went on to say: “Has the United States lost its oomph as a superpower? Even President Obama isn’t immune from the gloom. ‘Americans won’t settle for No. 2!’ Obama shouted at one political rally in early August. How about No. 11? That’s where the U.S.A. ranks in Newsweek’s list of the 100 best countries in the world, not even in the top 10.

The second piece, which could have been called “Why We’re No. 11,” was by the Washington Post economics columnist Robert Samuelson. Why, he asked, have we spent so much money on school reform in America and have so little to show for it in terms of scalable solutions that produce better student test scores? Maybe, he answered, it is not just because of bad teachers, weak principals or selfish unions.

“The larger cause of failure is almost unmentionable: shrunken student motivation,” wrote Samuelson. “Students, after all, have to do the work. If they aren’t motivated, even capable teachers may fail. Motivation comes from many sources: curiosity and ambition; parental expectations; the desire to get into a ‘good’ college; inspiring or intimidating teachers; peer pressure. The unstated assumption of much school ‘reform’ is that if students aren’t motivated, it’s mainly the fault of schools and teachers.” Wrong, he said. “Motivation is weak because more students (of all races and economic classes, let it be added) don’t like school, don’t work hard and don’t do well. In a 2008 survey of public high school teachers, 21 percent judged student absenteeism a serious problem; 29 percent cited ‘student apathy.’ ”

There is a lot to Samuelson’s point — and it is a microcosm of a larger problem we have not faced honestly as we have dug out of this recession: We had a values breakdown — a national epidemic of get-rich-quickism and something-for-nothingism. Wall Street may have been dealing the dope, but our lawmakers encouraged it. And far too many of us were happy to buy the dot-com and subprime crack for quick prosperity highs.

Ask yourself: What made our Greatest Generation great? First, the problems they faced were huge, merciless and inescapable: the Depression, Nazism and Soviet Communism. Second, the Greatest Generation’s leaders were never afraid to ask Americans to sacrifice. Third, that generation was ready to sacrifice, and pull together, for the good of the country. And fourth, because they were ready to do hard things, they earned global leadership the only way you can, by saying: “Follow me.”

Contrast that with the Baby Boomer Generation. Our big problems are unfolding incrementally — the decline in U.S. education, competitiveness and infrastructure, as well as oil addiction and climate change. Our generation’s leaders never dare utter the word “sacrifice.” All solutions must be painless. Which drug would you like? A stimulus from Democrats or a tax cut from Republicans? A national energy policy? Too hard. For a decade we sent our best minds not to make computer chips in Silicon Valley but to make poker chips on Wall Street, while telling ourselves we could have the American dream — a home — without saving and investing, for nothing down and nothing to pay for two years. Our leadership message to the world (except for our brave soldiers): “After you.”

So much of today’s debate between the two parties, notes David Rothkopf, a Carnegie Endowment visiting scholar, “is about assigning blame rather than assuming responsibility. It’s a contest to see who can give away more at precisely the time they should be asking more of the American people.”

Rothkopf and I agreed that we would get excited about U.S. politics when our national debate is between Democrats and Republicans who start by acknowledging that we can’t cut deficits without both tax increases and spending cuts — and then debate which ones and when — who acknowledge that we can’t compete unless we demand more of our students — and then debate longer school days versus school years — who acknowledge that bad parents who don’t read to their kids and do indulge them with video games are as responsible for poor test scores as bad teachers — and debate what to do about that.

Who will tell the people? China and India have been catching up to America not only via cheap labor and currencies. They are catching us because they now have free markets like we do, education like we do, access to capital and technology like we do, but, most importantly, values like our Greatest Generation had. That is, a willingness to postpone gratification, invest for the future, work harder than the next guy and hold their kids to the highest expectations.

In a flat world where everyone has access to everything, values matter more than ever. Right now the Hindus and Confucians have more Protestant ethics than we do, and as long as that is the case we’ll be No. 11!

2010 m. rugsėjo 11 d., šeštadienis

Harford versus Rachman apie ekonomikos "mokslą"

Sweep economists off their throne
By Gideon Rachman
Published: September 6 2010 20:08 Last updated: September 6 2010 20:08

When Paul Krugman, a Nobel prize-winning economist, clashed with Niall Ferguson, a famous historian (and FT contributing editor), over how best to respond to the economic crisis, Prof Ferguson’s response was humorously humble. “A cat may look at a king,” he wrote, “and sometimes a historian can challenge an economist.”

As the proud owner of a huge grey Chartreux cat, and a history graduate, I believe that it is time to overturn this implicit intellectual hierarchy. The cats must unsheath their claws and lacerate the kings, ripping away their regal pretensions. The vanity of economists needs to be challenged. Above all, their claim to scientific rigour – buttressed by models and equations – must be treated much more sceptically.

When things were going well for the global economy, the prestige of economists rose steadily. They were the gurus of the age of globalisation. Governments, consultancies and investment banks rushed to hire economists, who were thought to possess vital skills and information. Historians, by contrast, were treated as mere entertainers and storytellers. They were archive-grubbers, lacking in scientific method – good on television, but useless with a PowerPoint and no help in government or the boardroom.

There has been some self-examination and soul-searching within the economics profession since the onset of the financial crisis. Joseph Stiglitz, another Nobel prize-winning economist, has suggested that: “If science is defined by its ability to forecast the future, the failure of much of the economics profession to see the crisis coming should be a cause of great concern.” Yet Prof Stiglitz’s conclusion is disappointingly mild: economists must simply search for new “paradigms” – and then presumably go back into the business of scientific prediction.

For somebody educated as a historian, there is an obvious alternative conclusion to draw from Prof Stiglitz’s opening observation. And that is to conclude that the entire attempt to treat economics as a “science ... defined by its ability to forecast the future” is misconceived.

The current debate reminds me of an after-dinner speech I once heard given in the mid-1980s by the late Geoffrey Elton, who was then regius professor of modern history at Cambridge. Elton argued that the function of the historian was to concentrate on the particular and the specific and to puncture the pretensions of social scientists, with their constant and futile effort to derive general, predictive laws from the study of the past. At the time – and through a fug of cigar smoke and alcohol fumes – it struck me as a curiously conservative and negative definition of the role of the historian. Our task, it seemed, was simply to stick our hand up and say: “Actually, chaps, it was a bit more complicated than that.”

But, in the current intellectual climate, it seems to me that Elton was saying something important. He was defending the empirical method and setting boundaries for what can be expected from the study of the past. With the exception of a few deluded Marxists, historians know that their work cannot be used to predict the future. History can suggest lessons and parallels and provide wisdom – but what it cannot do is provide a sociological equivalent of the laws of physics. Yet this seems to be the aspiration of many economists, who notoriously suffer from “physics envy”.

Some might respond that such a critique exaggerates the hardness of “hard” science and the softness of economics. Maybe so: but then again buildings constructed according to the laws of physics seem to stand, whereas policies and trading systems constructed according to the “laws” of economics have a nasty habit of collapsing.

Yet economists seem unlikely to abandon the belief that theirs is a discipline that makes “progress” and settles issues, in a way that resembles a hard science such as physics or chemistry. Ben Bernanke, the current head of the Federal Reserve, exemplified this belief in a famous speech in 2004 on the “Great Moderation”, in which he argued that there had been a “substantial decline in macroeconomic volatility”, largely because of improved monetary policy, based on advances in economic thinking.

The subsequent financial and economic crash may have dented the confidence of some economists in particular tenets of their discipline. But the Great Recession seems unlikely to dissuade many economists from the more fundamental belief that there are, indeed, predictive “laws” out there, just waiting to be discovered.

Rather than seeking to ape physicists, however, perhaps it is time for economists to learn a few lessons from history, or more precisely from historians.

The serious study of history goes all the way back to Herodotus in the fifth century BC. And yet today’s historians are far humbler about what they can hope to achieve than modern economists. Historians know that no big question is ever definitively settled. They know that every big and interesting topic will be revisited, revised and examined from new angles. Each generation will reinterpret the past and deliver its own verdict.

This way of looking at the world is less obviously useful to practical men, seeking to make decisions. But maybe it is time for an alternative to the brash certainties, peddled by those pseudo-scientists, otherwise known as economists.


Models tell us more than hindsight
By Tim Harford
Published: September 10 2010 22:41 Last updated: September 10 2010 22:41

According to my esteemed colleague Gideon Rachman, economists should be swept off their thrones by historians. Economists have had far too strong a stranglehold on the levers of power, he claims. They think they are scientists. They think they can foretell the future. They are wrong: “pseudo-scientists”, “peddling brash certainties”. Historians such as Gideon and Professor Niall Ferguson, hitherto relegated to backwaters such as the FT’s op-ed page, should at last be paid a bit of attention.

In pondering how to respond, I suffered an acute shortage of brash certainty. Gideon is quite right about the importance of history. When it comes to economics, however, the chief source of brash certainties appears to be Gideon, who wouldn’t know an economic model if it paraded down a catwalk at him.

I know as little about history as Gideon knows about economics, but no doubt he is right to suggest that an important role of the historian is to emphasise the knotty particularity of time and place, and the difficulty of producing sweeping scientific laws that accurately describe a complex social world. Economists, sociologists, psychologists and anthropologists should appreciate this just as keenly. The best do. Many do not and, sadly, they are over-represented in the media. Perhaps this is the reason Gideon misunderstands the task and the methods of economics.

He argues that while economic edifices are always collapsing, “buildings constructed according to the laws of physics seem to stand”. This is an odd statement. Buildings constructed according to the laws of physics have a habit of falling down. Henry Petroski, engineer and author of Success through Failure, observes that structural engineers tend to learn by constructing ever more ambitious structures. When one of them falls down or wobbles, engineers figure out what was wrong with their models. Sometimes the results are tragic: when the innovative Malpasset dam cracked thanks to inadequate geological modelling, nearly 400 people died. Sometimes they are delicious: the award-winning Kemper Arena collapsed, with no loss of life, just 24 hours after hosting the American Institute of Architects Convention. From his riverside eyrie, I think Gideon can just see the famous wobbly bridge across the Thames. Is this really a damning indictment of the laws of physics?

But, of course, our grasp of the laws of physics is not to blame. The trouble is the difficulty of modelling them in a world with snowdrifts, clay seams and error-prone contractors. In short, buildings, like economic institutions, stand up not because of our grasp of the laws governing them, but because they have survived a process of trial and error in a complex world.

Economic institutions are more complicated and unique than any building. No wonder that progress is so difficult. But Gideon is too quick to dismiss “models and equations”. I agree that macroeconomic models have proved fairly useless. I also agree that economists, like historians, sociologists, political scientists and newspaper columnists, make terrible forecasters. But few academic economists bother to try, and forecasting models represent a small slice of the mathematics deployed by economists.

What, for instance, of the famous contention by the economist Steven Levitt and his co-author, John Donohue, that legalised abortion in the US reduced the crime rate about 18 years later? This is a hypothesis about history, but one that no historian is well-qualified to judge. Instead, the hypothesis has been tested statistically with some ingenuity; the statistical models themselves have been contested, pulled apart, found wanting in some respects, double-checked using alternative data and tested against the experience in other countries. The debate continues. Is this process “science”? I am not sure. But it certainly isn’t idle banter.

No doubt economists can learn from historians, but the search for economic regularities should not be abandoned. It is not limited to traditional economic approaches. We know much more about economics thanks to the work of Robert Axtell (computer scientist), Cesar Hidalgo (physicist), Duncan Watts (sociologist), Esther Duflo (an economist who runs the kind of controlled experiments which, according to Gideon, don’t happen in economics) and Daniel Kahneman (psychologist). All of them use those pesky “models and equations”. Are mainstream economists receptive enough to such invaders? The best ones are. The majority are not, but that is a fact about academia, not economics.

At least Kahneman has been rewarded for his efforts with a Nobel memorial prize. (Or as Gideon would put it, a “fake Nobel”. The Nobel Memorial Prize in Economics was established in 1968, long after the dynamite magnate’s death, unlike the rigorously scientific Nobel Peace Prize awarded to Henry Kissinger, or the rigorously scientific Nobel Prize for Literature denied Leo Tolstoy.)

My own supervisor, Paul Klemperer, is presumably the kind of economist Gideon despises: a game theorist who tries to understand the world through mathematical models. How quaint and arrogant. But my clearest recollection of Paul’s teaching is a series of classroom demonstrations calculated to undermine predictions of game theory and to open his students’ minds to the likelihood that the models lacked something important.

Paul used those models to help design an auction that raised £22.5bn for the British government, and then helped the Bank of England design an auction that would help them to inject liquidity into banking. Paul can’t forecast the future, but the auctions have – like many buildings – stood up well so far.

Historians deal in hindsight. It is a wonderful thing. But it is not the only thing. I wonder whether Gideon, intoxicated with a heady brew of Niall Ferguson and Herodotus, has forgotten that.

Gideon Rachman responds:

In his spirited and learned defence of his beloved economists, Tim Harford makes a mistake that is a characteristic of the profession that we both really belong to – journalism. That mistake is to rest too much of his argument on a couple of anecdotes. The story about the collapse of the Kemper Arena is indeed delightful. The implication Tim seems to draw is that the laws of physics and engineering are no more reliable than the “laws” of economics. They are all just hypotheses, which are gradually improved by trial-and-error in the real world. But it is my perhaps lazy impression, that the hard sciences have established a body of settled, scientifically-testable knowledge that economics simply cannot lay claim to. Is Tim really saying that ain’t so?

Tim also admits that macroeconomic models have proved “useless” at forecasting but suggests that this is a minor matter, since few academic economists “even bother to try”. But the starting point for my piece was Joseph Stiglitz’s suggestion that “the failure of much of the economics profession to see the crisis coming should be a cause of great concern.” And Professor Stiglitz is a winner of the Bank of Sweden prize for economics – sometimes referred to as the Nobel prize.

2010 m. rugsėjo 4 d., šeštadienis

Robert Reich apie antrą krizės bangą JAV

The Great Jobs Depression Worsens, and the Choice Ahead Grows Starker
Friday, September 3, 2010

The Great Jobs Depression continues to worsen.

The Labor Department reports this morning that companies created ony 67,000 new jobs in August. That’s down from the 107,000 they created in July. And because the government laid off temporary Census workers, the economy as a whole lost 54,000 jobs.

To put this into perspective, we need 125,000 net new jobs a month just to keep up with the growth of the population and the potential workforce.

Think of it this way. The number of Americans willing and able to work but who cannot find a job hasn’t stopped growing since the start of 2008. All told, about 22 million Americans are now jobless. Add in those who are working part-time who’d rather be working full time, and we’re up to 25 million.

And because most families depend on two paychecks, the practical impact is almost double.

All this has a negative multiplier on the economy. If families can’t pay their bills, their mortgages become delinquent (that’s why mortgage delinquencies keep rising), their credit card bills go unpaid (we’re seeing a notable rise in credit card defaults), and they can’t afford to buy anything other than necessities (hence auto sales have plummeted, new homes sales are down, and retail sales are in the pits).

As a result, more and more businesses decide to lay off workers (or refrain from adding them) because they can’t sell the goods and services they produce.

The last time we saw anything on this scale was in the 1930s. The last time we did anything about this on the scale necessary to reverse the trend was in the 1930s and 1940s.

It is not that America is out of ideas. We know what to do. We need massive public spending on jobs (infrastructure, schools, parks, a new WPA) along with measures to widen the circle of prosperity so more Americans can share in the gains of growth (exempting the first $20K of income from payroll taxes and applying the payroll tax to incomes over $250K, for example).

The problem is lack of political will to do it. The naysayers, deficit hawks, government-haters and Social Darwinists who don’t have a clue what to do would rather do nothing. We are paralyzed.

If there was ever a time for bold government action it is precisely now. Obama should be storming the country, demanding the largest responses to the jobs emergency in history. He and the Dems should be giving Republicans hell for their indifference to all this.

Instead, Obama is all over the map — a mosque controversy, an Israeli-Palestinian peace talk (that may take years to complete if ever), a symbolic withdrawal from Iraq, and lots of little tax-cutting ideas.

Senate and House Democrats, meanwhile, are on the defensive. Polls even suggest Dems may lose the House and possibly even the Senate in November.

Business leaders have either gone silent or gone reactionary, as they did in the 1930s.

But the pain and suffering of tens of millions continue. Government revenues continue to drop, and the safety nets and public services they rely on are subject to even more cuts.

Ever wonder why the nation is turning isolationist and xenophobic? Why we’re lashing out at undocumented immigrants, even though fewer are here now than a few years ago; why the rise of anti-Islam feeling now, although 9/11 was nine years ago? Why the virulence and hate-mongering on right-wing radio, and the surliness in the blogosphere?

The practical choice we face is this: Either major action to reverse the jobs emergency or years of intolerably high unemployment coupled with demagoguery and scapegoating.

2010 m. rugsėjo 2 d., ketvirtadienis

Paul Krugman apie JAV vs. Vokietijos nedarbą

What is this telling us? German growth hasn’t been great, one quarter notwithstanding; but it avoided US-style mass layoffs even when it was slumping badly. Part of the explanation is the Kurzarbeit program of work-sharing; also, Germany’s labor laws and its strong unions have led to a situation in which workers aren’t treated as much as variable costs as they are here.

So American conservatives now holding up Germany as a role model are actually praising the virtues of Eurosclerosis, and disparaging American-style capitalism.

Skolos defliacija paprastai

Paul Krugman: Inflation, Deflation, Debt
September 2, 2010, 2:53 pm

Some readers ask what’s actually a very good question: even granted that inflation reduces the real liabilities of debtors, it also reduces the real assets of creditors. So why is there any benefit to the economy?

The answer is, I think, easier to understand by considering the reverse case: the problem of debt-deflation. Here a falling price level increases the real value of all debts — and Irving Fisher famously argued that this has a contractionary effect on the economy, possibly turning into a vicious circle. Why?

The answer is that on average, debtors are more likely to be constrained by their balance sheets than creditors. The 1929-33 plunge in prices made heavily mortgaged farmers poorer, while making wealthy people sitting on cash richer; but while the farmers were forced to slash spending to make their payments, the people sitting on cash merely had the option of spending more — an option many didn’t take. Or, to lapse into economese, the marginal propensity to spend out of wealth is surely higher for debtors than for creditors, so the redistribution of real wealth caused by deflation is contractionary. And conversely, redistribution through inflation raises overall demand.

And all of this in turn explains why debt, even if it’s debt we collectively owe to ourselves, can be a major economic problem.

Interviu su Thomas J. Sargent

Čia (pdf).

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‘Clunkers,’ a classic government folly
By Jeff Jacoby, Globe Columnist September 1, 2010

IN THE market for a used car? Good luck finding a bargain: The price of “pre-owned’’ vehicles has climbed considerably over the past year. According to Edmunds.com, a website for car buyers, a three-year-old automobile today will set you back, on average, close to $20,000 — a spike of more than 10 percent since last summer. For some popular models, the increase has been much steeper. In July, a used Cadillac Escalade was going for around $35,000, or nearly 36 percent over last July’s price.

Why are used-car prices rocketing? Part of the answer is that demand is up: With unemployment high and the economy uncertain, some car buyers who might otherwise be looking for a new truck or SUV are instead shopping for a used vehicle as a way to save money.

But an even bigger part of the answer is that the supply of used cars is artificially low, because your Uncle Sam decided last year to destroy hundreds of thousands of perfectly good automobiles as part of its hare-brained Car Allowance Rebate System — or, as most of us called it, Cash for Clunkers. That was the program under which the government paid consumers up to $4,500 when they traded in an old car and bought a new one with better gas mileage. The traded-in cars — which had to be in drivable condition to qualify for the rebate — were then demolished: Dealers were required to chemically wreck each car’s engine, and send the car to be crushed or shredded.

Congress and the Obama administration trumpeted Cash for Clunkers as a triumph — the president pronounced it “successful beyond anybody’s imagination.’’ Which it was, if you define success as getting people to take “free’’ money to make a purchase most of them are going to make anyway, while simultaneously wiping out productive assets that could provide value to many other consumers for years to come. By any rational standard, however, this program was sheer folly.

No great insight was needed to realize that Cash for Clunkers would work a hardship on people unable to afford a new car. “All this program did for them,’’ I wrote last August, “was guarantee that used cars will become more expensive. Poorer drivers will be penalized to subsidize new cars for wealthier drivers.’’ Alec Gutierrez, a senior analyst for Kelley Blue Book, predicted that used-car prices would surge by up to 10 percent. “It’s going to drive prices up on some of the most affordable vehicles we have on the road,’’ he told USA Today. In short, Washington spent nearly $3 billion to raise the price of mobility for drivers on a budget.

To be sure, Cash for Clunkers gave a powerful jolt to car sales in July and August of 2009. But it did so mostly by delaying sales that would otherwise have occurred in April, May, and June, or by accelerating those that would have taken place in September, October, or later. “Influencing the timing of consumers’ durable purchases is easy,’’ Edmunds CEO Jeremy Anwyl wrote a few days ago in a blog post looking back at the program. “Creating new purchases is not.’’ Of the 700,000 cars purchased during the clunkers frenzy, the estimated net increase in sales was only 125,000. Each incremental sale thus ended up costing the taxpayers a profligate $24,000.

Even on environmental grounds, Cash for Clunkers was an exorbitant dud. Researchers at the University of California-Davis calculated that the reduction of carbon dioxide attributable to the program cost no less than $237 per ton. In contrast, carbon emissions credits cost about $20 per ton in international markets.

Using Department of Transportation figures, the Associated Press calculated that replacing inefficient clunkers with new cars getting higher mileage would reduce CO2 emissions by around 700,000 tons a year — less than Americans emit in a single hour. Likewise, the projected reduction in gasoline use amounted to about as much as Americans go through in 4 hours. (And that’s only if you assume — contrary to historical experience — that fuel consumption decreases when fuel efficiency rises.)

When all is said and done, Cash for Clunkers was a deplorable exercise in budgetary wastefulness, asset destruction, environmental irrelevance, and economic idiocy. Other than that, it was a screaming success.