Wednesday, December 16, 2015

The Fed Moves: At Last

Seven years ago today, in response to a very real financial emergency, the Fed embarked upon its zero interest rate policy. With the emergency long over the Fed finally acted by raising the federal funds rate by 25 basis points. Because the rate rise was accompanied by very dovish comments the stock market rallied smartly and the bond market, which had correctly priced in the move, ended the day substantially unchanged.

There are three points to take note of:
1. Monetary policy remains extraordinarily accommodating. My analogy is that on a 65 mph speed limit highway, instead of going 90 mph the car has slowed down to a still excessive 85 mph. Thus today's move is unlikely to slow the economy and in fact with the Fed signalling that the emergency is over, the economy could very well speedup.
2. Markets are way too complacent about inflation. With the core CPI increasing at a 2% rate yoy it won't take much for the Fed's personal consumption deflator to be there as well. Moreover housing costs, health care and other services are reporting inflation rates well above 2%. Once oil prices stabilize and likely reverse their recent decline most of the ingredients will be in place for an upside surprise in the inflation data. Stay tuned!
3. If you closed your eyes and I told you that core inflation was 2%, the unemployment rate was 5%, GDP growth is above 2%, and the stock market is close to an all time high, what would you guess the fed funds rate to be? It would be quite a bit higher than .25%-.5%. 

Net Net. Interest rates will surprise on the upside.

Saturday, December 5, 2015

My Amazon Review of Eric Rauchway's "The Money Makers: How Roosevelt and Keynes Ended the Depression, Defeated Fascism, and Secured a Prosperous Peace"

Too Partisan to be Real History

UC Davis history professor Eric Rauchway let his rabid partisanship get in the way of some of the real history that is in his book. His cheer-leading is obvious in the subtitle and that should clearly warn less biased readers. It is not so much what Rauchway left in, but rather what he left out and in doing that he did a real disservice to his readers.

What Rauchway leaves out is as follows:
1.     Although he rightly blames the operation of the gold standard as one of the predominant causes of the Great Depression, he fails to discuss how successful it was in spurring growth in the five decades up to World War I.
2.     He fails to emphasize the fact that it was the imbalances caused by the financing of World War I that was the key element in the demise of the gold standard.
3.     He completely ignores the “forgotten depression’ of 1920-21 where recovery was rapid absent most of the Keynesian remedies that came later and he ignores the great prosperity of the 1920s.
4.     He hails President Roosevelt in his “blowing up” of the World Economic Conference in 1933, but fails to mention that far from being an internationalist, Roosevelt was an isolationist. The fascists in Europe took note of America’s withdrawal from the world.
5.     He characterizes the 1936 Tri-Partite Agreement to stabilize the French Franc as the start of an anti-Nazi coalition. Wrong! Although France was lost some gold following the German reoccupation of the Rhineland, the real cause of the Franc’s collapse was the popular front policies of Leon Blum which scared the living daylights out of French Capital.
6.     He completely ignores the fact that after all of the New Deal spending programs and the Federal Reserve money printing, the economy remained mired in depression as late as 1939.
7.     He makes way too a big deal out of the congressional vote to join the IMF. The measure passed both houses of Congress easily.

8.     Although he notes that Assistant Treasury Secretary Harry Dexter White, Keynes' negotiating partner at Bretton Woods, was a Soviet spy, he doesn’t take seriously the Soviet penetration into the highest circles in the New Deal.
9.     In his glorification of managed currencies he fails to note the debacle that came after Nixon closed the gold window in 1971. Further if you want a date to start when the United States economy became “financialized” you can do a lot worse than 1971. Whatever the real problems of the gold standard, it would certainly have acted as a very real constraint on what we call “the shadow banking system”.

For readers who want a better understanding of the Great Depression I would recommend much of the works of Barry Eichengreen, Ben Bernanke and Peter Temin.

For the full Amazon URL see:

Thursday, December 3, 2015

2016: "Full Employment" with Modest Inflation, UCLA Anderson Forecast, December 2015

With the unemployment rate at 5% reported for
October, the economy is operating at or very close to the
traditional definition of full employment. (See Figure 1).
However, because the employment to population ratio of
59.3% is four percentage points below that recorded prior
to the start of the financial crisis in 2006, for more than a
few Americans the economy does not feel anywhere close
to full employment. (See Figure 2). Nevertheless, employment
growth remains healthy with the economy generating
jobs at a 200,000 a month clip that will bring with it further
declines in the unemployment rate to 4.6% (See Figure 3).

Although GDP growth stalled in the third quarter at
a tepid 2.1% annual rate, a mini-inventory cycle knocked
0.6% off the reported growth rate. The growth in real inventories
declined from $113.5 billion in the second quarter to
a more normal $90.2 billion in the third quarter. (See Figure
4, revised data not reflected in the chart) With the bulk

Figure 1 Unemployment Rate 2007Q1- 2017Q4F
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson

Figure 2 Employment to Population Ratio, 1948 – Oct 2015, Monthly Data, Percent
Sources: U.S Bureau of Labor Statistics via FRED.

the inventory correction behind us, we anticipate that real
GDP will grow at a 2.9% annual rate in the current quarter
and grow at a 3.1% year-over-year pace in 2016, the highest
since 2005. (See Figure 5). The seemingly high 3.8%
growth we are forecasting in the first quarter of 2016 is due
to the temporary end of the “sequester” just agreed to by
Congress that will trigger a surge in federal spending that
quarter. Our preliminary view for 2017 is that growth will
slow to 2.6% as a result of the tightening labor market and
the move towards interest rate normalization. (See below)

Higher Wages and Inflation

The tightening labor market will bring with it the
long-awaited increase in employee compensation. Instead
of increasing at the 2010-2015 average of 2.1% a year,
compensation is forecast to increase at a 3.5% and 4.2% rate
in 2016 and 2017, respectively. (See Figure 6) Anecdotal
evidence coming from the retail, construction, meat packing
and professional services sectors indicate that wages are
already rising well above what the official data is reporting.

Figure 3 Payroll Employment, 2007Q1 -2017Q4F, SAAR
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 4 Real Change in Inventories, 2007Q1 -2017Q4F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 5 Real GDP Growth, 2007Q1-2017Q4
Sources: U.S. Department of Commerce and UCLA Anderson Forecast
Figure 6 Employee Compensation per Hour, 2005Q1 -2017Q4F
Bureau of Labor Statistics and UCLA Anderson Forecast

Adding to the cost pressures coming from the labor
market, especially in the broadly defined services sector, it
is our expectation that oil prices will begin to rebound in
2016 as domestic output from the very short-lived fracking
wells is cut by about a million barrels a day and the intense
budget pressures on OPEC and Russia lead to some degree of
output restrictions. (See Figure 7) Further, as we have noted
in the past, housing costs are already rising at a 3% pace
coming from the continued tightness in the rental market.

As a result, inflation as measured by the Consumer
Price Index (CPI) will ramp up to 2.1% in 2016 and 3.4%
in 2017. (See Figure 8) Perhaps more important, the core
CPI, which excludes food and energy is forecast to increase
2.3% and 2.6% in 2016 and 2017, respectively. The Fed is
about to get the inflation it has been waiting for.

The Fed to Start Normalizing Interest Rates

Seven years ago this month, in response to the rapidly
metastasizing financial crisis, the Federal Reserve embarked
upon its zero interest rate policy and later adopted three
massive programs of quantitative easing. With the financial
emergency long over, the unemployment rate indicating
near full-employment and the likelihood that inflation will
soon approach its 2% target, we expect the Fed to begin
normalizing interest rates by increasing the Federal Funds
rate this month. Thereafter, we anticipate that the initial pace
towards the normalization of policy will be gradual, but if
we are correct about our outlook for inflation, the Fed will
begin to speed up the process. Thus, we forecast that by the
end of 2016 the federal funds rate will be about 1.5% and it
will approximate 3.25% at the end of 2017. (See Figure 9)
Figure 7 Oil Price, West Texas Intermediate Crude,
2007Q1 – 2017Q4
Sources: Commodity Research Bureau and UCLA Anderson Forecast

Figure 8 Consumer Price Index vs. Core CPI, 2007Q1 - 2017Q4
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 9 Federal Funds vs. 10-Year U.S. Treasury Bonds,
2007Q1 -2017Q4
Sources: Federal Reserve Board and UCLA Anderson Forecast

The Consumer in the Driver’s Seat

Driven by a strengthening labor market and an improved
balance sheet, the consumer is once again playing
its leading role in the economy. Real consumption spending
is expected to increase by 3.2% this year and again in 2016.
(See Figure 10) Don’t be all that concerned about the negative
headlines affecting such retail stalwarts as Macy’s and
Nordstrom. The fact remains that the retail landscape has
long shifted away from the traditional department stores
to more innovative formats and more importantly, internet

Evidence of the robustness of consumer demand is
coming from red hot automobile sales where is now appears
that selling rates on the order of 18 million units might be
the new normal. (See Figure 11) Further, as we noted last
quarter, the new housing market is rapidly improving and we
anticipate that housing starts will exceed 1.4 million units in
both 2016 and 2017 compared to an estimated 1.13 million
units this year. (See Figure 12) Indeed the fourth quarter of
this year is forecast to come in at a 1.23 unit million annual
rate. We also expect the housing baton to be passed from
the white hot multi-family sector to the construction of
single-family homes which remains well below prior levels
of activity. If we are wrong here it will not be due to higher
interest rates, but rather to a shortage of construction workers
that is already hampering the delivery of new homes.
Nonresidential Construction: A Tale of
Two Markets
Investment in nonresidential construction stalled in
2015. (See Figure 13) While growing in most categories,
investment in mines and wells, almost all of it related to
oil and gas drilling, collapsed under the weight of the 60%
decline in oil prices. For example, from the 4Q2014 through
Figure 10 Real Consumption Spending, 2007Q1 -2017Q4F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 11 Light Vehicle Sales, 2007Q1 – 2017Q4,
In Millions of Units
Sources: BEA and UCLA Anderson Forecast

Figure 12 Housing Starts, 2007Q1 -2017Q4
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

the current quarter of this year, real investment in mines and
wells will have declined from $137 billion to $70 billion, a
decline of nearly 50%. (See Figure 14) On a purely arithmetic
basis this decline whacked 0.4% off 2015 real GDP.

In contrast, commercial construction of office buildings,
shopping centers and warehouses is ramping up in
response to growing demand for modern offices and the
need to improve the retail supply chain. This investment is
being funded by the flood of capital reaching for real estate
yields in a yield starved world. Since the low in the 1Q2011
to the third quarter of 2015, real investment in commercial
construction has increased from $63 billion to $108 billion.
(See Figure 15) Further, because this sector is still just ramping
up, we forecast real commercial construction spending
to be $145 billion in 2017, still well below the $191 billion
recorded in the long ago year of 2000.

Exports Remain the Big Risk

Already weak export growth has gotten weaker in
recent quarters. (See Figure 16) American exporters are
facing the twin challenges of weak foreign economies and a
very strong dollar which is up 18% over the past year. (See
Figure 17) Where earlier in the recovery real exports were
growing at a 12% rate, we will now be lucky to achieve 4%
growth. Because we believe that most of the global weakness
is behind us, we anticipate that the foreign exchange
value of the dollar will soon peak and then gradually decline.
We would note that if we are wrong here and the global
economy continues to weaken and the dollar continues to
strengthen, our forecast of 3% growth in 2016 would be
way over optimistic.

There are two other risks with respect to trade. With
the leading contenders for both parties’ presidential nominations
opposed to the proposed Trans Pacific Partnership there
is a very real possibility that the United States will turn down
its first major trade deal since the 1930s. Although turning
down the deal in the short run would not have an immedi-

Figure 13 Real Investment in Nonresidential Construction,
2007Q1 -2017Q4F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 14 Real Investment in Mines and Wells,
2007Q1 -2017Q4F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 15 Real Investment in Commercial Structures,
2007Q1 -2017Q4
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

ate impact on real GDP, it could nevertheless negatively
impact the stock market and over the longer run seriously
hamper exports as our Asian trading partners make separate
deals among themselves and with China. Second, the
mass migration crisis facing Europe along with the horrific
acts of terrorism in Paris have the potential to break apart
the Eurozone with unknown consequences for the global
economy. Compared to immigration, the Greek crisis was
a walk in the park for the European elite.

Defense Spending on the Rebound

As we have been arguing for over a year, the five year
decline in real defense spending is over. Congress recently
amended its “sequester” program to allow defense spending
to increase. We have modeled in further increases in defense
spending for 2017 to account for the increasingly dangerous
geopolitical environment. In our view this increase will
not be a one-off event, but rather the start of a major trend.
Meantime, we forecast that real defense purchases will
increase by 2.9% and 2.4% in 2016 and 2017, respectively.
(See Figure 18)


Continued job growth along with wage increases
will power consumption in 2016 leading to the first year
of greater than 3% growth in real GDP since 2005. Higher
wages along with a modest rebound in oil prices and higher
housing costs will push the inflation rate above 2% leading
the Federal Reserve to embark on a gradual tightening cycle
that will begin this month. Strength will be evidenced in
housing and commercial construction along with a booming
automobile market. The collapse in oil-related capital
spending will come to an end next year and defense spending
will be increasing after five years of decline.

Sunday, November 29, 2015

OPEC: Looking into the Abyss

OPEC is in crisis. With Brent crude trading at around $45 a barrel, the price of oil has traded lower and for longer than most analysts anticipated since the oil price collapse that began late last year. The oil price shock has brought the Venezuelan economy to its knees, is threatening Saudi Riyal's peg to the dollar and has put Russian economy into recession. Meantime Saudi Arabia, the Gulf states and Russia are fighting expensive wars in Syria and Lebanon. 

Sooner or later something has to give because if nothing comes out of the OPEC meeting scheduled for this Friday, and nothing is expected, there are more than a few analysts who believe that the oil price could fall into the low $30s or perhaps into the $20s. Although OPEC is nowhere near as strong as it once was it still accounts for about 31 million barrels/day  of output, approximately 1/3 of  global production of about 94 million barrels/day which is about 2 million barrels/day too much. Add in Russia's 11 million barrels/day of output you get to about 45% of global production.

My guess is that the current pain that OPEC and Russia are feeling and the prospect of future pain coming from another break in oil prices is too great. OPEC in concert with Russia will act to reduce output. While there was much press commentary about Syria when Putin met with the Saudi Foreign Minister in Moscow a few weeks ago and again when Putin met with the Ayatollah Khamenei in Tehran last week, there was nary a comment on oil prices. It strains the imagination to think that they did not talk about oil prices. Thus the surprise coming out of the OPEC meeting will be recommended cuts in output with the implicit cooperation of Russia. All it would take would be a 5% drop in the combined output of OPEC and Russia to bring supply and demand into balance.

But you would say I am not taking into account the planned increase in Iranian oil exports. I think that is over-rated because Iranian oil is already finding its way into the market outside of the sanctions regime.

Monday, November 23, 2015

My Amazon Review of Paul Halpern's "Einstein's Dice and Schrodinger's Cat: How Two Great Minds Battled Quantum Randomness to Create a Unified Theory of Physics

Not Physics for Dummies

Physicist Paul Halpern has written and interesting and difficult book about the lives and theories of two of the greatest physicists of the 20th century. His discussion about the lives and philosophies of Einstein and Schrodinger is fascinating. This is especially true when he discusses Einstein’s deity in the context of Baruch Spinoza which leads him to believe that science is deterministic and not probabilistic. Hence Einstein’s aphorism that God does not play dice with the universe.  He also goes into great detail about Schrodinger’s very active sex life with more than a few women all the while being married. He spends more time on this than Schrodinger’s famous cat that is half dead and half alive.

At least for me, where he makes it difficult for the lay reader is his discussion of the science of Einstein and Schrodinger. Before reading this book I would suggest that the lay reader become very acquainted with the equivalent of “quantum mechanics for dummies,” “relativity for dummies,” and “unified field theory” for dummies.” Alas with only one course of college level physics there were many parts of this book where I was lost. The book needs clearer examples of the theories and diagrams would be of great help.

Finally his title is somewhat of a misnomer. Neither Einstein nor Schrodinger, try as they might, never arrived at a unified theory of physics. Even today’s standard model which Halpern acknowledges does not account for the role of gravity while accounting for electromagnetism and weak and strong forces of nuclear interaction. With that last sentence I am way over my head.

For the full Amazon URL see:

Saturday, November 21, 2015

My Amazon Review of Roger Lowenstein's "America's Bank: The Epic Struggle to Create the Federal Reserve"

The Making of the Fed

The “money question” is as old as the Republic. In “America’s Bank” Roger Lowenstein tells the story as to how the United States in 1913 brought into being its first central bank since 1837. Recall that the Second Bank of the United States came to an end when President Andrew Jackson refused to renew its charter. This triumph of Jacksonian Democracy would come back to haunt the Democrats who supported the creation of the Federal Reserve.  

To be sure there were panics and crashes in those intervening years, but absent a central bank the U.S. still grew to become the largest economy in the world. What triggered the need for a central bank was the Panic of 1907 which nearly brought the economy to its knees and it required the rescue of a bankers syndicate led by one James Pierpont Morgan. In response to the panic, Congress passed the Aldrich-Vreeland Act which authorized the Secretary of the Treasury to issue emergency currency and it established a National Monetary Commission to investigate the causes of the panic and to recommend policy changes. Unlike the 2008 financial crash Congress acted first with the Dodd-Frank Law and then created a financial inquiry commission whose work is already forgotten.

It here where we begin to see the leading players involved in the creation of the Fed. First and foremost is Rhode Island Senator Nelson Aldrich who chairs the commission, studies European central banks and becomes convinced of the need for a central bank in the U.S. Next is Paul Warburg, a German immigrant and scion of the Warburg banking family who worked for their U.S. affiliate Kuhn Loeb. He is rightfully called by most historians and Lowenstein as the father of the Federal Reserve as he becomes the most knowledgeable and tireless advocate for a central bank.  It is Warburg and Aldrich who organize the famous Jekyll Island bankers’ retreat where all of the essential elements of the Federal Reserve Act are written in secret. Sometimes transparency isn’t such a good idea.

After the Democrats sweep the 1912 elections Republican Aldrich is moved to the sidelines and the new key players are President Wilson who deftly works around his party’s Jacksonian traditions and Representative Carter Glass of Richmond, Virginia, who though a Jacksonian becomes the leading advocate for a central bank. Glass would later as a Senator, be the coauthor of the Glass-Steagall Act separating commercial banking from investment banking. Lowenstein spends a great deal of time dealing with both Wilson’s and Glass’ maneuverings to bring about passage of the act. He tells a good story especially in regard to how the U.S., in deference to its Jacksonian traditions, doesn’t have one central bank but rather a national board with 12 district banks.

I have a few quibbles with this otherwise wonderful book. First he doesn’t’ really tell us why there is a district bank in Richmond, Virginia, perhaps it is Carter Glass’ hometown or why there are two district banks in Missouri. Is it because the Speaker of the House Champ Clark was from Missouri or was it out of concern with supplying credit to agriculture in the Midwest? Finally, although he mentions it in passing, he doesn’t really go into how successful the pre-Fed Aldrich Vreeland Act was in the summer of 1914 in supplying needed cash to the banking system after the outbreak of World War 1. Remember although enacted in 1913, the Fed did not open its doors until December 1914. Friedman and Schwartz note in their “Monetary History…” that the use of Aldrich-Vreeland money in 1914 did a far better job in protecting the banking system than what the Fed did in 1930-31. 

For the full Amazon URL see:

Friday, November 20, 2015

The French Lion and the American Poodle

It has been five days since the horrific terrorist attacks in Paris. During that interval we have learned much about the character of the President of France and the President of the United States. It is clear that French President Hollande is a decisive leader ready and willing to act to defend his country. In contrast President Obama, of the squishy red-line, appears to be more hostile towards his domestic opponents than ISIS. With his typical debating style he argues he doesn't allow for a middle ground between an all-out intervention and doing nothing. 

Perhaps he should talk to his former Secretary of State who is now advocating a no-fly zone and committing considerably more special operations forces. Mrs. Clinton is obviously way more clear eyed than her former boss. For whatever reason President Obama has become the American poodle to the French lion. 

Monday, November 16, 2015

My Amazon Review of Ivan Maisky's and Gabriel Gorodetsky's (Ed.) "The Maisky Diaries: Red Ambassador in the Court of St. James 1932-1943"

Stalin’s Ambassador to London

Gabriel Gorodetsky has done an enormous public service in editing the diaries of Ivan Maisky, Stalin’s ambassador to London from 1932-43. The diaries bring to life the interwar diplomacy of Britain and Russia as they attempt to deal with the rise of Nazi Germany. It will be referenced in all future books on foreign policy of the interwar years. However, for the lay reader it a very long book (633 pages in the print edition).

Maisky working under Soviet Foreign Minister Maxim Litvinov became one of the architects of Moscow’s policy of “collective security” to contain the Nazi menace. Unfortunately that policy failed and after Munich when Stalin turned towards Germany to make is separate peace. He highlights the degree of mistrust both Russia and Britain had for each other. Each feared, correctly as it turned out, that the other would make a separate deal with Hitler.

What the diaries highlight is that Maisky was among the first of the modern ambassadors who dealt with more than official government to government relations. He established a broad range of contacts outside official channels. He was very close to the then back bencher Winston Churchill and Lord Beaverbrook. Those two contacts would become extremely important after the Nazi invasion of Russia in June 1940. He was also close to such Bloomsbury group personages as Sidney and Beatrice Webb, the Shaws and H.G. Wells. On an official basis he was very close to Foreign Secretary Anthony Eden, perhaps too close in the sense he probably learned stuff that would normally have been more secure.

Through his Marxist eyes he sees the rot of the British upper classes and their infatuation with appeasement and the Nazi sympathizers among more than a few of them. However, he fails to see the contradiction of his high living and numerous shopping trips when compared to the privation the Russian people were going through in 1930s Russia.

Although not directly mentioned in the diaries, he must have been living under constant stress as Stalin’s purge enveloped all of the “old Bolsheviks”   and Mensheviks who were in positions of authority. This was exacerbated by the replacement of Litvinov with Molotov in 1939 which completely recast the Soviet diplomacy that was in place since 1920. Simply put the professional diplomats were moved out and replaced with party apparatchiks.

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Thursday, October 29, 2015

Housing is Back II, UCLA Economic Letter, October 2015

This post is an updated version of an earlier post with same title. However the link below contains all of the charts that were omitted.

Saturday, October 24, 2015

My Amazon Review of Ben S. Bernanke's "The Courage to Act: A Memoir of a Crisis and its Aftermath"

Only in America*

This is an American story about the rise of the son of a Jewish druggist from the backwater town to Dillon, South Carolina to the commanding heights of the global economy. When he is writing about his boyhood and personal life Bernanke writing shows the benefits of the creative writing course he took in his freshman year at Harvard. Unfortunately when he writes about policy making the writing becomes more guarded and academic. Nevertheless it remains a very lucid account of the financial crisis and its aftermath.

He chronicles his early life in the segregated South to his working construction and as waiter at the very touristy South of the Border rest stop off I-95 to his arrival at Harvard and graduate school at MIT. From there he goes on to teach at Stanford and Princeton establishing his reputation as a leading scholar of the depression (See his “Essays on the Great Depression”)

He leaves academia first to become appointed a Governor on the Federal Reserve Board by President George W. Bush, to the chairmanship of the Council of Economic and then in early 2006 to the chairmanship of the Federal Reserve Board. To my mind the Fed including Bernanke and other regulators flunked in failing to see the onset of the financial crisis brought about by reckless lending not only in the housing markets but through the creation of an array of toxic financial products. However with the onset of the financial crisis in August 2007 through mid-2009 the Fed and others did indeed have the courage to act. Here Bernanke and crew get an A in throwing everything but the kitchen sink at the crisis. In my mind their actions avoided the Great Depression 2.0.

Bernanke argues, correctly in my opinion, that Lehman Brothers, my former employer, could not have been saved. At the time it looked Lehman’s balance sheet was too toxic for any private sector party to handle. It is easy to second guess, but you have to put yourself in the shoes of the decision makers when they made the decision. However, while spending quite a bit of time on Lehman, Bernanke gives short shrift to the two wards of the Fed, Citi and Bank of America/Merrill Lynch. Were they just as insolvent as Lehman, who knows, but Bernanke doesn’t tell.

With the high drama of the financial over Bernanke covers his defense of the Fed in the writing of the Dodd-Frank Financial Reform Act and his growing friendship with Democrat Barney Frank, the Chair of the House Financial Services Committee. He also highlights his growing dislike of what I call the “wrecker caucus” within the Republican Party. This animosity causes him to leave the Republican Party. Who can blame him?

He then goes on to discuss the very sluggish recovery and the very low rate of inflation. He brings the reader into the internal Fed debate involving the policy choices to expand the Fed’s balance sheet with QE2 and QE3 and the continuation of the Zero Interest Rate Policy throughout his entire term and beyond.  As a result the Fed’s balance sheet quintuples during his tenure in office. He gives himself high marks in promulgating these policies. Further he contrasts the relative success of the U.S. economy when compared to Europe and Japan where more orthodox monetary and fiscal policies were followed.

In this judgement Bernanke is premature. It is far too early to judge how the 8 year policy of zero rates and the explosion of the Fed’s balance sheet will look to a future Ben Bernanke writing in 2025. Remember in 2005 Alan Greenspan looked like a genius and three years later not so much.

*-With apologies to another Jewish South Carolinian, Harry Golden.

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Friday, October 9, 2015

The Republican Wrecker Caucus Strikes Again

The so called Republican "Freedom Caucus" in the House of Representatives is at it again .After failing miserably in their attempt to shut down the government in 2013 (see prior posts: and they have succeeded in forcing the retirement of House Speaker John Boehner and prevented House Majority Leader Kevin McCarthy from succeeding him.  The wrecker caucus as I call them has no interest in governing, in fact by their actions they don't really understand how the Constitution works. Simply put without 60 votes in the Senate and a 2/3 majority in both Houses the Senate Democrats and President Obama hold most of the high cards.

As I previously wrote they are very much like the nihilistic student protesters of the late 1960s. They care more about making a point than actually governing. It feels good for them, but it is the country that will suffer. Just like some of their 1960s counterparts they are oh so dour and oh so mean spirited. Where is the optimism of a Ronald Reagan? The wreckers don't understand that the way to success is with a smile on your face and a song in your heart.  

Moreover after watching the wreckers in action why would American voters want to give control of the government to the Republican Party. If it weren't so tragic, one can argue that the wreckers are part of some diabolically Clintonian scheme to elect Hillary president.

Don't you think its time for the grownups, if there are any left, in the Republican Party to take charge?

Wednesday, October 7, 2015

Giving Opportunism a Bad Name: Hillary and TPP

Hillary Clinton came out against the Trans Pacific Partnership (TPP)  trade agreement today. After publicly supporting it over 30 times as President Obama's secretary of state, she has succumbed to the hot breath of protectionism now emanating from the left wing of the Democratic Party and it new exemplar, Bernie Sanders. Simply put, she is giving opportunism a bad name.

Now with much of the Republican Party under the spell of the protectionist Donald Trump, the chances of Congress approving the TPP next year are slim and none. The situation is further complicated by John Bohner's departure from the House leaving the Republican rookies in charge. It was a tough sell to give Obama "fast-track" authority earlier this year; it will be a far tougher sell next year.

Meantime in a world that is growing more chaotic by the day, this is not good news for the United States and it is certainly not good news for the global stock markets.

Saturday, October 3, 2015

My Amazon Review of Michael Storper's "The Rise and Fall of Urban Economies: Lessons from San Francisco and Los Angeles"

Winners and Losers in the New Urban Economy

Michael Storper et. al. have written an important book on the impact of the “new economy” on the growth and decline of major urban centers. It is destined to become a classic in regional economics and urban planning. The lead author is a professor of urban planning at UCLA. The authors use the Los Angeles and San Francisco metropolitan areas from 1970 to the present as a contrasting case study of how these two regional economies adapted to the transition from an industrial economy to an information economy.  To Storper and his coauthors San Francisco succeeds because it has a far more adaptable and open source business ecology than the more enclosed corporate world of Los Angeles. Further San Francisco’s advantage is augmented by a more far seeing and cohesive business/government community that adopts public policies to enhance the information economy. To the authors it is these two critical factors more than the role of immigration and the 1990s collapse of aerospace in Los Angeles that account for the stunning differences in economic performance.

To be sure these are valid points, but to my mind the authors over-state their case. Simply put the Los Angeles of 1970 suffered from the “tyranny of an installed base” and lacked the high gross margin businesses that could withstand the increasing tax and regulatory pressures coming from local government and the state of California.

Now let’s look at the data. In 1969 the Los Angeles CMSA had approximately four million workers with 1.1 million of them engaged in manufacturing. At the same time the San Francisco CMSA had approximately 2.1 million workers with fewer than 400,000 engaged in manufacturing. Los Angeles was a manufacturing region, in fact the largest in the U.S.. If that is all you knew and you posited that the revolution in global trade would bring U.S. manufacturing to its knees in the coming decades, then you would predicted that San Francisco would easily outperform Los Angeles. By 2013 employment in Los Angeles increased to 7.6 million, but manufacturing jobs plummeted to 700,000. By contrast San Francisco employment increased to four million jobs while manufacturing barely declined to 360,000 jobs.

What Los Angeles had was low margined traditional industrial, aerospace and apparel jobs, while San Francisco had much higher margined technology and specialized production jobs. To further prove my point the worst performing Bay area county was the one with the most traditional manufacturing jobs, Alameda County. Although people talk about the economic juggernaut of Silicon Valley few talk about the success of Alameda County’s major city, Oakland. Although it is an exaggeration, economically speaking the Los Angeles of 1970 looked a lot more like Oakland than San Jose.

One of the advantages Silicon Valley had was a legacy of the politics of the 1960s. Recall that at that time the primary buyer of advanced electronics was the Department of Defense and Silicon Valley vigorously competed with Highway 128 in Boston and Texas for the business. With the Kennedy-Johnson years defense money flowed to Boston and Texas and not to Silicon Valley which did not have the near monopoly position that Los Angeles had in defense oriented production. So what did Silicon Valley producers do to respond? They went after the commercial market and became far more adaptable than their competitors. Thus, when the aerospace recession of 1969-76 hit, Silicon Valley was prepared.

The authors duly note that Los Angeles was a major technology center in 1970, but most of that technology was based on aerospace. Unlike northern California where most technology enterprises were small and entry was easy, the ecology of the aerospace industry is based on large units with difficult entry. While job mobility in aerospace is high, for example I spent two years in the aerospace industry and worked at two large firms, capital mobility is not. You didn’t see venture capital funding aerospace start-ups.

Another way in which the tyranny of an installed base affected Los Angeles was the presence of a huge Hispanic population in the area. This meant that when the manufacturing base collapsed, the political structure had to respond to the loss of employment opportunities for that population. The response was to beef up the ports of Los Angeles and Long Beach which made them the entrepot for the flood of goods coming in from Asia. To the authors this activity increased middle and lower income employment, but were nowhere near the high jobs being created in San Francisco. What choice did the political establishment have?

This review doesn’t do justice to the very serious economics work that the authors present. I just wanted to point out to future readers to not completely buy in to the authors’ thesis. Initial conditions are very important and cannot be discounted. However, the authors offer much food for thought and demonstrate that public policy in this area is very difficult to make.


Tuesday, September 29, 2015

Housing is Back, UCLA Anderson Forecast, September 2015

After a long, hard slog, housing starts (both single and
multi-family) are poised to approach the long-term
average (1959-2014) of just under 1.5 million units in
2016. (See Figure 1) Specifically we are forecasting housing
starts of 1.14 million units this year and 1.42 million units
and 1.44 million units in 2016 and 2017, respectively. This
level of activity is well above 1.00 million units recorded in
2014 and the 2009 low of 0.55 million units. Remember that
the level of activity we forecast is far from the mid-2000s
boom level of above two million units a year. We would also
note that with the shift to multi-family starts, the per-unit
GDP “bang for the buck” has declined, but that factor has
been partially offset by increased emphasis on higher-end
housing in the new construction market.

Our forecast is underpinned by continued growth in
real GDP that will likely run at a 3% rate in 2016, continued
jobs gains in excess of 200,000 a month for most of the forecast
period, relatively low mortgage rates--at least through
2016 and household formations in excess of one million a
year in 2016 and 2017. (See Figures 2, 3, 4 and 5) To dig into
the weeds, our estimates for household formation is derived
from the Current Population Survey which when compared
to the Housing Vacancy Survey seem conservative. Further,
the improving labor market will act as an ongoing stimulus
to household formations.

Although low mortgage rates have been with us for
years, what is important is that credit standards have eased
with respect to FICO scores and down payment requirements
have been reduced. To be sure we are not going back to the
“wild west” lending standards of 2005, but compared to
2010, and yes early 2014, mortgage credit conditions have
decidedly eased. Moreover, we do not believe that higher
mortgage rates will meaningfully cut into housing activity
until 2017 as a rise in rates will initially hasten buyers into
the market out of fear that rates will go much higher. Time
will tell whether or not this assumption is too heroic

Figure 4 30-Year Conventional Mortgage Rate,
2005Q1 – 2017Q4

Figure 5 Household Formations, 2010-2017F

Figure 2 Real GDP Growth, 2005Q1 – 2017Q4F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 6 S&P/Case-Shiller Home Price Index, 20 City Composite, 2000 - June 2015, 2000=100

Figure 7 Existing Home Sales, 2000 - 2017F

The rebound in housing construction is being confirmed
by rising home prices with the widely reported Case-
Shiller Index up 5% year-over-year and up 30% since the
low in 2012. (See Figure 6) Similarly, existing home sales
are forecast to be 5.3 million units this year up from the 4.1
million unit low in 2008. (See Figure 7) We forecast that
existing home sales will reach 5.5 million units in 2016 and
modestly decline to 5.3 million units in 2017.

Interestingly, the housing recovery is occurring
under the backdrop of an unprecedented decline in
home ownership. Specifically, the home ownership rate
has declined from 69% in 2005 to the current 63.5%,
which is roughly where it was in 1989. (See Figure 8)
The decline in the home ownership rate is attributable to the
after effects of the housing crash of 2006-2010 which scared
off would be homeowners, tighter mortgage requirements,

Figure 9 Student Loan Debt, 2006Q1-2015Q2F, $Billions

Figure 8 Homeownership Rate, 1965 - 2015Q2, NSA

sluggish income growth, a shift in consumer preferences to
urban versus suburban lifestyles, and the rapid growth in
student loans which now exceed $1.2 trillion (See Figure
9) In fact, the biggest drop in homeownership has taken
place in 25-34 year old cohort where the rate dropped 5 full
percentage points from 1993 -2014.1 We believe that this
declining trend has about run its course and will soon begin
reversing. In support of this notion we note that the recent
decline in life events associated with home ownership such
as marriage and childbirth have ebbed and are now in the
process of reversal.

The Boom in Multi-Family and Rentals

The flip-side of the decline in the homeownership
rate is a rise in renting which has triggered a boom in multifamily
housing starts (See Figure 10). Multi-family housing
starts which bottomed in 2009 at 112,000 units will exceed
400,000 units this year and average 460,000 units over the
next two years. The boom is underpinned by rents increasing
at a 3.5% a year rate in the official data, but according to the
publicly traded apartment real estate investment trusts, rents
are increasing on the order of 4.5-5.0%. (See Figure 11) As
we have noted before, the official data tends to lag the actual
market place because of the prevalence of rent controlled
jurisdictions in the official sample. Simply put, rents in con-

Figure 11 Consumer Price Index, Rent of Primary Residence, January 2000 - July 2015, Percent Change Year-Over-Year

Figure 10 Multi-Family Housing Starts, 2000Q1 – 2017Q4F

trolled jurisdictions aren’t typically marked to market until
a vacancy occurs. The primary reason that rental increases
have been sustainable is a very low 4% national (based on
79 cities) apartment vacancy rate, roughly half of what it
was a few years ago. (See Figure 12)

Moreover, this cycle has given rise to nationally oriented
single-family rental businesses funded by institutional
investors and public offerings of shares. This business is the
creature of the huge amount of bank foreclosed property that
came on the market in the aftermath of the financial crisis
enabling the bulk buying of single-family homes. Thus far,
single-family rentals have captured an unprecedented half
of the total rental market over the past few years and the
public companies have been reporting rental growth on the
order of 4% a year. 

In fact we are now witnessing the purchase
of new single-family homes for the rental market by
investment institutions and the development of homes for
rent by traditional home-builders. This consumer preference
for single-family rentals is one of the reasons we believe
that the American dream of at least living in a single-family
home is far from dead and ultimately many of those rental
units will turn into owner occupied housing.

The trends outlined above have not gone unnoticed
by the investment community as torrents of cash has flowed
into the sector driving up apartment values and spurring new
construction. In a yield constrained world, the cash flows
associated with apartment ownership have looked increasingly
attractive to institutional and retail investors alike
and that has driven initial yields down to below 5% and to
below 4% in the more favored markets. Just to note, initial
yields on apartment projects were close to 8% at the height
of the financial crisis.
Figure 12 Apartment Vacancy Rate, 1980 - March 2015

However, because we expect interest rates to rise
over the next few years, the decline in homeownership rate
to level off and high new construction levels to negatively
impact vacancy rates, the apartment boom is likely to show
real signs of strain by late next year.

More importantly, with rents rising faster than incomes,
affordability will soon become a binding constraint
on rents. For example, from 2004-2014, the percentage of
households paying more than 30% of their income rent
increased from 40% to 46%.2 With developers building for
the top of the market, meaning high income renters, they
may not yet to be cognizant of this trend, but they will soon
find out that the high-end apartment market might not be as
deep as they think.

Yes, housing is back. It will not be a rerun of the 2005
boom, but starts will soon approach 1.5 million units a year.
The multi-family apartment boom will continue throughout
2016 as developers race to keep up with demand for urban
infill housing. Nevertheless, housing activity will begin to
gradually fade in 2017 as mortgage rates rise and apartment
vacancies increase.

Friday, September 18, 2015

The Fed Non-Move and the Stock Market

Yesterday the Federal Reserve maintained its zero interest rate policy and after briefly rallying stocks sold off sharply and the decline accelerated this morning, What gives? There are two possible explanations for this market behavior. The first is that the Fed is really frightened about the prospects for the global economy. What do they know that the market doesn't? Second by introducing an international mandate, by the way something that does not exist in the Federal Reserve Act, the Fed introduced a new uncertainty into its policy making. Simply put it would seem they are making it up as they go along making it nearly impossible for market participants to make an informed judgement about the future course of policy. Either way this is a recipe for low multiples.

Wednesday, September 9, 2015

Stock Market Volatility: Its More Than the Fed; Its "Stick it to the Man" Politics

The stock market has been trading nervously, to say the least, but it is more than next week's Fed meeting. In fact I believe that it would be far more bullish for the Fed to raise rates than to leave them alone. When historians look back at the current epoch they will not be concerned with whether or not the Fed raised interest rates in September 2015, but rather they will look at the very volatile politics we are now witnessing. Simply put the economy is not working for most of the electorate and its mood is to "stick it to the man."

It is not only the rise of the protectionists Donald Trump and Bernie Sanders in the U.S.; it also involves the imminent rise to power of Jeremy Corbyn, a wacko leftist, in the British Labor Party and the growing popularity of the the rightist Marine Le Pen in France. I would note that solving Greece's financial difficulties is a walk in the park compared to the challenge of the refugee crisis now facing the EU. Financial problems are more easy to deal with than cultural issues. The Eurozone can fail on the immigration issue.

In the U.S. the rise of Trump and Sanders means that passing of the Trans Pacific Partnership deal now being negotiated just might not pass when it comes up for an up and down vote. Don't count on the Republicans to pass it. They are squishy just like most politicians.

Thus it does not matter what the Fed does next week, volatile markets will be with us for awhile.

Sunday, August 30, 2015

My Amazon Review of Craig Nelson's "The Age of Radiance: The Epic Rise and Dramatic Fall of the Atomic Era"

Three Books in One

Craig Nelson has really written three books. The first one on the history of nuclear physics from 1890 – 1960 and physicists involved is terrific. The second one is on the role of nuclear weapons during the Cold War and here his biases show and he leaves much to be desired. The third book embedded in “Radiance” is a history of nuclear power where he emphasizes the three big disasters of Three Mile Island, Chernobyl and Fukushima which highlights the incompetence and the corruption of the nuclear industry. Here he is on pretty solid ground. And he recognizes that despite the disasters nuclear power might in the long run be better than carbon burning power plants.

His history of the science is easy to follow for the lay reader and he draws great insights into the personalities of Marie Curie, Enrico Fermi, Edward Teller, J. Robert Oppenheimer, Leo Szillard, John von Neumann and Otto Hahn. He is at his best when he discusses the life and work of Lise Meitner who rightly deserves credit for her Nobel Prize work with Otto Hahn in splitting the atom. Einstein rightly called her “our (meaning German) Curie.”  Also of note is his discussion of the coincidence of so many leading physicists and mathematicians all being born in early 1900s Budapest. What was in the Danube at that time?

Where he goes astray is in his views on the Cold War. To him Russia is always reacting to moves by the United States. Yet nowhere in the book is a discussion of the massive Soviet build-up that took place in the 1970s. His villain is Edward Teller, the co-developer of thermo-nuclear weaponry and the instigator of Reagan’s strategic defense initiative (SDI) known as “Star Wars”. His animus towards Teller goes back 1940s Los Alamos and his testimony critical of Oppenheimer during his security clearance hearing. To be sure Teller had his faults, but Nelson goes overboard. Nelson also fails to understand that a less than perfect SDI would have great deterrent value because it would increase the uncertainty with respect to a first strike.

So the way I would score it would be 5 stars for the history of science section, 4 stars for nuclear power and 3 stars for the Cold War portion. Net, net 4 stars.  

Thursday, August 27, 2015

My Letter to the NY Times on Water/Housing Issues, Aug 27, 2015

California faces a housing affordability crisis brought on, in part, by environmental restrictions on development. With folks priced out of the coastal markets, where would you have them live if you stifle development inland?

For the NYT URL see:

Friday, August 21, 2015

Is the Chinese Communist Party Losing its Mandate from Heaven?

China is in crisis. The economy is no longer working. Forget the 7% GDP growth the government mandarins are posting. In all likelihood the economy is contracting. How can it not be with automobile sales, exports and construction in decline? Remember that China is the only country that has never revised its GDP statistics. They make it up as they go along. The recent devaluation of the Yuan confirmed that the economy isn't what it used to be. 

With the Communist Party no longer able to deliver economic growth, its widely publicized effort to prop up the stock market failed and with that billions of dollars have evaporated. 

Further the deadly industrial accident in Tianjin proved to the populace that the government failed to protect the rising middle-class who lived nearby in high-rise apartments. 

It is one leadership failure after another and it is calling into question whether or not the ruling Communist Party still has its mandate from heaven. Simply put, it is losing control. Time will tell, but meantime the global economy will be in for a rough ride.

Sunday, August 9, 2015

Red Light for the Iran Nuclear Deal

Last month I posted a cautionary note on the Iran nuclear deal by adopting a wait and see attitude. (See After further evaluation I have come to the conclusion that no deal is better than a bad deal and unfortunately the deal brought back from Austria is a bad a deal and even though the opponents do not have an alternative I believe the United States would be better served if the Congress turns it down in September.

Two new pieces of information have come to light since my last post. First there is a giant exception to the snap back sanctions should Iran violate the terms of the agreement. That exception is that all prior economic arrangements entered into by Iran would be grandfathered in. This means that all Iran has to do is to make long term agreements with western, Russian and Chinese companies and those agreements would remain intact no matter what Iran did. Thus there would be no immediacy to the snap back sanctions.

Second there is a host of side agreements with the IAEA, the deal's "enforcer", that make it difficult to understand just exactly what enforcement regime Iran will be under. For example what will be the notice provisions with respect to inspections, what exactly is the baseline, and whether or not military facilities would be on or off limits. President Obama is relying on a whole lot of trust, but not too much on verification. 

Thus with the enforcement regime shaky at best and with Iran receiving $150 billion in frozen assets to enhance its position in the region, the deal should be voted down. True Iran may ultimately change for the better, but in the meantime the regime is being run by a bunch of religious thugs who shout "death to America" six times a day in their daily prayers. 

Friday, August 7, 2015

Fox News and Republicans Put on a Great Debate

We learned quite a bit last night from the first Republican debate of the election season. The debate confirmed that Donald Trump is both a bully and a jerk. Aside from Trump, the Republican field is strong with exceptional performances coming from Marco Rubio, John Kasich, Ben Carson and yes, Mike Huckabee. Both Bush and Walker disappointed because we expect more from front runners. In the pre-debate Carly Fiorina shined and in what will be showed over and over on YouTube she took down MSNBC reporter Chris Matthews in her post debate interview.

Over the longer term Fox News was the real winner. The very tight questioning by Bret Baeir, Megyn Kelly and Chris Wallace established the network's preeminence in covering the 2016 campaign. They set a high bar and we will see if other network interviewers will be as tough on the Democrats as Fox was on the Republicans.

Monday, July 27, 2015

My Amazon Review of Evan Thomas' "Being Nixon: A Man Divided"

His Own Worst Enemy

Evan Thomas, a pillar of what you would call the “eastern liberal establishment” has written a very sympathetic biography of Richard Nixon. As someone who both hated and respected Richard Nixon, Evans helped me understand the many aspects of Richard Nixon that made him such a confounding personality.

He was an introvert in an extrovert business. He could be a strategic genius, especially with respect to China, and at the same time be narrow and vindictive. To be sure he had real enemies who hated him for his doggedness in bringing the spy, Alger Hiss, to justice. For the liberals of his day that was Nixon’s greatest sin. And Nixon was correct in believing that the press had a double standard by continually giving Kennedy free passes while continually holding his feet to the fire with even the smallest of transgressions.

Nevertheless when Nixon’s “evil” side took over when he ordered his minions to run roughshod over the Constitution in what became known as the Watergate Affair where he was rightly impeached. In this sordid episode we see him seeking into a depression induced paranoia fueled by alcohol.

Although he did not cover himself with glory in Vietnam, his policies that were highly criticized at the time can now be better understood with the passage of time. For example the bombing of Laos and the invasion of Cambodia were, given the circumstances, military necessities.

Evans covers Nixon from his humble beginnings in Whittier, California to his graduating third in his Duke University Law School class where he achieved success by working hard and always being prepared. Those traits became a hallmark of his later career including his success at poker while in the U.S. Navy.

Evans portrays Nixon as a caring father and sometimes oblivious husband to Pat, who he loved very much. We get much insight into his character from his daughter Julie. We also learn that Nixon could be kind when he sent a letter to Thomas Eagleton’s teenage son after Eagleton was dumped from the Democratic ticket in 1972. Both father and son were touched by Nixon’s humanity.

In contrast we see his dark side where he appears to have enlisted Anna Chennault to torpedo the Paris peace talks ahead of the 1968 election by offering South Vietnamese President Thieu a better deal than what Lyndon Johnson had on the table.

In sum Evans sheds a great deal of light on one of the most influential politicians of the second half of the 20th Century and reads very well to boot.

The full Amazon URL is;

Sunday, July 19, 2015

A Yellow Light for the Iran Nuclear Deal

The proposed Iran nuclear deal is 159 pages long, loaded with technical issues pertaining to nuclear physics, the inspections regime and the enforcement provisions which if they work will delay Iran's progress towards a nuclear arsenal by at least decade. A noble goal. But, this is very complicated stuff, an arms control pact with the leading state sponsor of terrorism if you will, yet proponents and opponents are rushing to judgement without fully understanding the nature of the deal.

To me it makes sense to wait and to listen to what comes out in the upcoming hearings that in all likelihood will flush out the issues mentioned above. Nevertheless I do have some priors. Because President Obama wanted the deal more than the Grand Ayatollah it is logical to assume that the U.S. could have gotten a better deal. In selling the deal President Obama uses the example of Nixon going to China, but in that episode the U.S. was allowed to establish a base in western China to monitor Soviet missile tests. There is no equivalent here.  But that doesn't mean the current deal on the table is a bad deal. As we have often noted, you can't make the perfect the enemy of the good.

My concerns with deal have to do with the inspection regime where somehow "anytime anywhere inspections" have been scrubbed in favor of a 24 day managed process. We also don't know if the IAEA is capable of conducting a verifiable inspections regime in a hostile environment. And we don't know how the inspectors and the international community will deal with what appears to be small technical violations of the deal. For that matter we don't know whether or not there will be the will to reimpose a full set of sanctions in the face of obvious breaches.

And finally the opponents of the deal have to offer a realistic alternative should they vote down the agreement. Simply put the question is will we be better off with the deal or without it? Hopefully we will be able to answer that question by the end of the summer.

Thursday, July 16, 2015

Greece Needs Merkel's Tough Love

Whether Greece knows it or not, Angela Merkel has done Greece a great favor. Simply put Greece is incapable of reforming on its own. Let's face it, since Greece achieved its independence from the Ottoman Empire in 1832 it has hardly been a paragon of good government and economic growth. Left to its own devices Greece doesn't work.

What the EU has done under Merkel's leadership is force Greece to undertake the needed labor, pension, fiscal, taxation and market reforms that are necessary for economic growth. To be sure, in the short run Greece will go through economic hell, but remember leaving the Euro would bring with it a far more difficult hell. For those who argue that Greece should return to the Drachma, I have one simple question: where are the foreign exchange reserves to support a new currency. Tspras, to his credit, understood this fact.

Of course Merkel and the EU will have to relent on debt relief. The IMF is correct in its position that the current Greek debt situation is unsustainable. Although the EU will not or cannot grant a direct haircut to Greece's debt, it is in their power to restructure Greece's debt burden by lowering interest rates and extending maturities which would be the equivalent of a direct haircut.

Greece has stepped up to the plate by accepting the EU bailout conditions, it is now up to to the EU to move on debt relief. If it all works out in 20 years Greece will build a statue to Angela Merkel in Syntagma Square.

Sunday, July 12, 2015

Two History Lessons for Janet Yellen

On the eve of Fed Chair Janet Yellen’s semi-annual monetary policy testimony to the Congress I think it is appropriate to discuss two lessons from history that are appropriate for today. First there is a great deal of concern about the impact of the Fed moving off of its zero interest rate policy out of fear that it would trigger financial instability in the global economy that could blow back to the U.S.. One lesson from history suggests that giving international concerns priority over domestic concerns is fraught with unintended consequences.

For example in July of 1927 New York Fed President Benjamin Strong summoned the heads of the central banks of the U.K., France and Germany for a meeting to discuss fissures that were developing in the international gold standard, the sustainability of continued lending to Germany and most important the need to maintain Sterling at its new parity. Instead of focusing on the domestic economy which was recovering very smartly from the 1926 slowdown, the Fed yielded to international pressure and lowered the discount rate from 4.0% to 3.5%. Strong realized there was a risk of creating a stock market bubble by noting to Deputy Bank of France Director Charles Rist that the contemplated rate cut would be “coup de whisky” for the stock market. It was a risk he was willing to take and from then on the stock market went hyperbolic to create blow-off of 1929. As we noted in an earlier post despite all of the cries from Wall Street to keep rates low, Janet Yellen was not put on this earth to be the fairy godmother of the stock market.

Our second lesson concerns the myth of 1937 which blames the economic collapse of that year on a tightening of monetary and fiscal policy. Professor Douglas A. Irwin of Dartmouth convincingly debunks that myth with his “Gold Sterilization and the Recession of 1937-38” in the December 2012 issue of Financial History Review.  ( To Irwin it was not the doubling of reserve requirements by the Fed or the fiscal tightening by President Roosevelt, but rather it was the Treasury gold sterilization policy that began in December 1936 and lasted into February of 1938 that triggered the downturn. From 1934-36 the monetary base fueled by huge inflows of gold increased at 17% annual rate. Fearing speculative capital inflows, the so called “hot money,” the Roosevelt Administration elected to sterilize the inflow of gold. With that growth in the monetary base came to a complete halt. It was gold sterilization, not the nonbinding increase in reserve requirements that caused the recession.

The lessons here are that Janet Yellen should worry less about the international effects of monetary policy and the myth of 1937. She should instead focus on the domestic economy with a 5.3% unemployment rate that appears to be on a 3% growth path with prices rising toward the Fed’s 2% target.

Saturday, June 27, 2015

Supreme Court Rescues the Republicans

In three important decisions the Supreme Court significantly improved Republican presidential prospects in 2016. First in upholding subsidies for the federal exchanges the Supreme Court took off the table the agonizing choices that the Republicans would have had to make with respect to seven million people losing their health insurance subsidies. Simply put the Republican Party would have been way too divided to come up with a practical solution.

Next with the Supreme Court legalizing gay marriage throughout the country, it essentially took a losing issue for the Republicans off the table. In its place the Republicans will find themselves on far more friendly terrain in their defense of religious freedom, Indiana notwithstanding. Thus the way is open for the Republican Party to become the party of pluralism and respect for individual beliefs.

Finally with the Supreme Court now, incorrectly in my opinion, allowing the use of disparate impact as dispositive evidence in housing discrimination cases we will witness a wave of litigation across the country pitting "civil rights" groups against local communities. This would be amplified if the "gosplanners" in HUD get there way to use federal power upend local control to achieve desegregation, both economic and racial. Here the fights will be ugly and it will redound to the benefit of the Republicans.

All that has to happen now is for the Republicans to avoid snatching defeat, as is their habit, from jaws of victory

Thursday, June 18, 2015

My Amazon Review of Philip Bobbitt's "The Garments of Court and Palace: Machiavelli and the World that he Made"

A Prince of a Man

International lawyer and historian Philip Bobbitt offers us a fundamental reinterpretation of Niccolo Machiavelli’s “The Prince.” Instead of it being a manual for tyrants “The Prince” is, in fact, an outline for the modern state that was to arise out of the feudal order. Bobbitt calls this new governmental form the “princely state” which he dates from the Treaty of Augsburg of 1555. For the reader not familiar with Bobbitt’s “Shield of Achilles,” his history of governmental order, this book can be rough going.

“The Garments of Court and Palace” combines a long book review with a biography of Machiavelli. To him Machiavelli’s priorities were to create a state to enhance the public good and to unify the feudal states of Italy into a unified whole. He puts into perspective one of Machiavelli’s most famous aphorisms, “the ends justify the means.” Taken literally this is a license for extreme actions, but Bobbitt notes that to Machiavelli the means have to be proportionate to the ends. When viewed this way, Machiavelli’s aphorism is a constraint on a ruler rather than a license.

Bobbitt has a lengthy discussion on the role of “virtu” and fortune in the affairs of a prince. “Virtu” here is defined as skill and resoluteness and fortune is the role of chance. A prince has to be constantly aware that fortune can overwhelm skill and effort or make a failed policy successful. Flexibility is the key and this also applies to previously entered treaties that no longer serve their original intent. Here I would add the comment of the 20th century political philosopher and baseball executive Branch Rickey who noted the “luck is the residue of design.” In other words a prince has to make his own breaks.

Machiavelli understood the feudal world was dying and a new form of governmental organization was required. To him a republic governed by a prince sensitive to the needs of his populace was the wave of the future.

Again as I noted above this book can be difficult going, but if the reader wants to get a sense of Machiavelli, his thoughts and the world he would make, it is worth the effort.

 For the full Amazon URL see:

Sunday, June 7, 2015

My Amazon Review of Francine Mathews' "Too Bad to Die: A Novel"

When Ian Fleming Became James Bond

Former CIA analyst Francine Mathews places the real life Commander Ian Fleming at the center of a German assassination plot to kill the Big Three at the Tehran Conference in late 1943. We first see Fleming at a pre-conference gathering in Cairo with Roosevelt and Churchill and their respective entourages. We get caught up in the political and sexual intrigues of such players as Pamela Churchill, Churchill’s daughter-in-law, who while longing for her boyfriend Averill Harriman, the U.S. ambassador to the Soviet Union, she had time to have an affair with CBS newsman Edward R. Morrow. There is also Churchill’s daughter Sarah Oliver who though married is having an affair with Gil Winant, the U.S. ambassador to Britain.

In Cairo Fleming, in his capacity as assistant to Britain’s director of naval intelligence, uncovers the German plot, code-named “Operation Long Jump”. He does this with the aid of Bletchley Park’s Allan Turing. As an aside “operation long jump” was a fictitious NKVD operation set up by Stalin to curry favor with the west to give him credit for foiling an assassination plot. Here it is all too real and as in the fictitious plot German commando and probably the exemplar of special operations Otto Skorzeny plays a leading role.

The plot involves an internal spy within the British or U.S. delegation code-named Fencer along with an accomplice code-named Kitten. It turns to Fleming to uncover the plot which takes us through the bazaars of Cairo and Tehran all the while we eves drop on the summit meeting that is setting the date for the invasion of Europe and beginning to redraw the map of Poland. Along the way Fleming is captured and tortured and of course runs into a very attractive spy. Here James Bond becomes his alter-ego.

Because we know the Big Three walked out of the Tehran Conference very much alive, the focus is on who is Fencer. For me that was an easy call, but despite that Francine Mathews knows how to tell a great tale of historical fiction.