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.

See the full Amazon URL at:

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.