"But many of the critics of mass fiscal stimulus have an alternative frame in mind, namely, that "employment increases spending."

Alex Tabarrok on Marginal Revolution makes a good point:

"Macroeconomics without Supply

Alex Tabarrok

Paul Krugman writes:

...if you believe that a surge in private spending would raise employment — and even the critics agree on that — it’s very hard to explain why a surge of public spending wouldn’t have the same effect.

Brad DeLong writes:

But surely we believe that if the U.S. government were to follow the Countrywide plan--to send its representatives out onto the streets to have them walk up to people and say: "Here's $500,000. You can have it if you go buy a house"--then that would drive a recovery, right?

What's interesting about these statements is not so much whether they are right or wrong (let's just say that it depends) but that Krugman and DeLong are so immersed in the Keynesian viewpoint that they cannot even see any other way of looking at the issue. Thus "even the critics" and "but surely we believe," as if no other view were conceivable.

Well if the only frame you can see is the "spending increases employment" frame then whether the spending is private or public may seem like a niggle. But many of the critics of mass fiscal stimulus have an alternative frame in mind, namely, that "employment increases spending."

Frame the issue this way and it becomes clear that the choice between private employment and public employment as a driver of spending is crucial. Moreover, when we remember that employment drives spending we focus attention on the real allocation of labor and capital across sectors of the economy, on internal and external fiscal balance, on investment as well as on consumption and on time paths of development. The "spending drives employment" frame misses all this."

These are good points. The government needs to spend money on:
1) The social safety net
2) Infrastructure
I have no good numbers on these, because, even if I were an expert, I still wouldn't know how much 1 will turn out to cost us, and 2 depends upon how many truly useful and cost efficient infrastructure projects we will be able to develop.

Otherwise, we should focus on the Fear and Aversion To Risk, which is the main problem that we are facing. The way to do that is to try and offer incentives for risk, such as tax reductions. Oddly, greater risk will lead to more jobs as lending and investment unfreeze.

One could also target consumption with a sales tax decrease or payroll tax decrease, which will be for a limited time only. This would offer some disincentive to saving, but not enough to stop all saving, since we need some increase in saving as well. Going forward, we should look into incentives for saving as well. But not right now.

"so that they quickly layoff workers when there is a falloff in demand"

Another good Mark Thoma post, featuring a number of my favorites:

"Are Workers Unwilling to Work?

Inventory to Sales Ratio

I am going to go out on a limb and assume this is the result of unintended inventory accumulation rather than, say, firms building up inventories in anticipation of an economic boom that is just around the corner. If so, then this is not a good omen for labor demand.( I THINK THAT IT HAS TO DO WITH THE REALLOCATION OF RESOURCES OUT OF THE HOUSING AND CAR MARKET )

Why is the word demand highlighted? The graph is mostly an excuse to note this from Brad Delong:

Casey Mulligan says--wait for it--that the reason that unemployment is the 7% it is right now rather than the 4.4% it was two years ago because workers today face "financial incentives that encourage them not to work":

Are Employers Unwilling to Hire, or Are Some Workers Unwilling to Work?: Employment has been falling over the past year... if total hours worked had continued the upward trend they had been on in the years before the recession, they would be 4.7 percent higher than they are now.... [Today s]ome employees face financial incentives that encourage them not to work.... [T]he decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire)...

pgl adds:

Believe it or not this explanation made it in print:

Because productivity has been rising ... the decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire).

As pgl notes, Casey Mulligan doesn't tell us why labor supply suddenly shifted inward, he promises that will be divulged later, but he does have a solution to the unemployment problem. He calls for--wait for it--tax cuts:

Why would some people have fewer incentives to take a job in 2008 than they did in 2006 and 2007 (and employers fewer incentives to create jobs)? I will tackle that question in my next post, but even without a specific answer we learn a lot about today’s recession from the conclusion that labor supply – not labor demand – should be blamed. First of all, it suggests that a fundamental solution to the recession would encourage labor supply (perhaps cutting personal income tax rates, so people can keep more of their wages), rather than tinker with demand.

Tax cuts could also work by increasing the demand for goods and services and hence the demand for labor, but this is a supply-side explanation where workers refuse to work at the wages being offered to them and decide to stay home instead, so that is not the mechanism he has in mind.

Dean Baker isn't buying the labor supply explanation. As he notes, a key component of this explanation is the claim by Mulligan that, "Unlike in the severe recessions of the 1930s and early 1980s, productivity has been rising." But why has productivity been rising relative to previous recessions? Dean Baker explains:

The one piece of data that drives this story is the apparent strength of productivity growth in this downturn relative to prior ones. But, there is a real simple story that can explain this pattern.

If we assume that in prior downturns firms were reluctant to lay off workers, both because of union contracts and also because they recognized the cost of turnover and hiring new workers, then we would expect sharp downturns in productivity growth as soon as there is a downturn in demand.

Now, imagine that firms are not constrained by union contracts and don't worry about long-term costs, so that they quickly layoff workers when there is a falloff in demand. Voila! productivity does not fall off in the same way in this downturn.( THAT'S MY EXPLANATION DEAN! ACTUALLY, I BELIEVE SOMETHING SLIGHTLY DIFFERENT. NAMELY, THAT THE FEAR AND AVERSION TO RISK HAS CAUSED SOME EMPLOYERS TO PROACTIVELY LAY OFF WORKERS WITHOUT AN ACTUAL DECREASE IN DEMAND. STILL, THE SAME POINT. )

That would be my story. We can try to do some more careful examination of declines in productivity sector by sector, but I suspect that this is what explains the difference in productivity patterns across downturns.

Whatever the explanation - and productivity is not easy to measure so the relationships in the data can be questioned - I find it highly implausible that worker's unwillingness to accept the jobs being offered to them is the source of the current employment problem."

I think that Mulligan has led me to an important confirmation of my view, by focusing on a really interesting anomaly, that the other writers either don't explain or even argue against. I'm going to wait and see what his answer is before judging his ideas on the merits. I actually found DeLong's, Krugman's, and another blogger's comments unfair.

Truly, Baker, like me, should find Mulligan's points important and interesting, even if we interpret them differently.

"Paradoxically (and inconsistent with expected value), ambiguity preceding a terrible outcome might be worse than the outcome itself"

From the Edge:

---

"BRIAN KNUTSON
Psychologist, Stanford University

WHEN WAITING IS THE HARDEST PART

How might the psychology of individuals matter in today's market?

Herbert Simon famously proposed that individuals suffer from "bounded" rationality— they can't attend to or remember everything all the time. Thus, far from optimizing, people muddle through decisions and "satisfice" instead. However, bounded rationality might only add noise, and needn't systematically bias people's risk preferences. On the other hand, recent theorists have argued that anticipatory emotional states (e.g., fear, excitement) can bias peoples' risk preferences(AS IS HAPPENING NOW ), and have begun to develop tools that allow them to test their claims.

For instance, neuroeconomists—including a motley crew of economists, psychologists, neuroscientists, and others—study how the brain makes decisions. Neuroimaging techniques have advanced over the past ten years such that they now allow scientists to track second-to-second changes in the activity of deep subcortical regions. This means we can examine activity in regions of the brain implicated in emotion not only after a decision has been made, but also during and even prior to the decision.

What have these fancy techniques revealed so far? First, the brain responds to uncertain future outcomes in a specific region (i.e., the anterior insula), and ambiguity (not knowing the probabilities of uncertain outcomes) provokes even greater activation in this same region. Further, insular activation precedes risk avoidance in investment tasks, and is even more pronounced before people "irrationally" avoid risks (i.e., or violate the choices of a risk-neutral, Bayesian-updating "rational" actor). Inflict enough ambiguity on enough people and you can immediately sense that they might lean towards risk aversion( IN THIS, I AGREE WITH JOHN TAYLOR. I'M JUST SAYING THAT THE MAIN AMBIGUITY ABOUT THE STRENGTH AND SCOPE OF THE GOVERNMENT GUARANTEES WERE TRIGGERED BY LEHMAN. THE RIPPLE EFFECT OF THE FEAR AND AVERSION TO RISK AND ACCOMPANYING FLIGHT TO SAFETY TOOK SOME TIME TO RIPPLE THROUGH TO OTHER PARTS OF THE ECONOMY AND MARKETS. ).

What are some implications of these findings for the current crisis? Presently, we need to put a price on ambiguous derivatives (a job for the economists). As long as the value of these contracts remains unresolved, this could generate ultra-uncertainty, which will promote fear, which will keep money in peoples' mattresses and out of the market( TRUE ). In the future, we should regulate (or incentivize)( I PREFER INCENTIVIZE AND SUPERVISE ) against contracts that resist pricing( ILLIQUIDITY ).

Paradoxically( AS I'VE SAID, PARADOX IS BASIC TO HUMAN EXISTENCE AND TO A HUMAN AGENCY EXPLANATION AND NARRATIVE THINKING ) (and inconsistent with expected value), ambiguity preceding a terrible outcome might be worse than the outcome itself( YES ). This could apply to derivatives or any dangerous scenario. Imagine teetering on the edge of a cliff in broad daylight. You look down to see a river running over rocks 100 meters below. Now imagine teetering on the edge of another cliff in the dead of the night. You peer down into a void. Which do you prefer?"

This is a terrific post. It explains exactly what has been going on since the Lehman Bankruptcy. Not understanding the consequences of inserting mass and systemic ambiguity into our economic system is the main cause of our crisis. We certainly had problems in our economy, but as Brad DeLong has shown, the amount of money these problems added up to do not warrant the virulence of the response. Only a Human Agancy Explanation, such as the one above, can do that.

"So the hangover theory, which I wrote about a decade ago, is still out there."

Paul Krugman with a good post:

"Somehow I missed this: via Steve Levitt, John Cochrane explaining that recessions are good for you:

“We should( THERE IS NO SHOULD ) have a recession,” Cochrane said in November, speaking to students and investors in a conference room that looks out on Lake Michigan. “People who spend their lives pounding nails in Nevada need something else to do.”( CREATIVE DESTRUCTION )

So the hangover theory, which I wrote about a decade ago, is still out there.

The basic idea is that a recession, even a depression, is somehow a necessary thing, part of the process of “adapting the structure of production.” We have to get those people who were pounding nails in Nevada into other places and occupation, which is why unemployment has to be high in the housing bubble states for a while ( TO THE EXTENT THAT THEY WERE EMPLOYED IN CONSTRUCTION, THAT COULD SIMPLY BE THE CASE ).

The trouble with this theory, as I pointed out way back when, is twofold:

1. It doesn’t explain why there isn’t mass unemployment when bubbles are growing as well as shrinking — why didn’t we need high unemployment elsewhere to get those people into the nail-pounding-in-Nevada business( BECAUSE THEY WOULD IMMEDIATELY BE EMPLOYED )?

2. It doesn’t explain why recessions reduce unemployment across the board, not just in industries that were bloated by a bubble.( FEAR AND AVERSION TO RISK. IN ALL RECESSIONS, THERE IS SOME PROACTIVE AND UNNECESSARY FIRING OF WORKERS )

One striking fact, which I’ve already written about, is that the current slump is affecting some non-housing-bubble states as or more severely as the epicenters of the bubble. Here’s a convenient table from the BLS, ranking states by the rise in unemployment over the past year. Unemployment is up everywhere( HENCE, MY POINT. THE FUNDAMENTALS CAN'T BE THE SAME EVERYWHERE ). And while the centers of the bubble, Florida and California, are high in the rankings, so are Georgia, Alabama, and the Carolinas.

So the liquidationists are still with us. According to Brad DeLong,

Milton Friedman would recall that at the Chicago where he went to graduate school such dangerous nonsense was not taught

But now, apparently, it is.( THERE WILL PROBABLY BE RECESSIONS, BUT WE SHOULD TRY AND STOP THEM. )

Update: Not to mention the idea that employment is dropping because workers don’t feel like working."

That's not what the post says. I argue that Productivity is Higher because Demand is higher than the firings warrant, due to the Fear and Aversion to Risk.

In any case, since we should adequately help people through a recession with our social safety net spending, it hardly makes sense to wish for one, if you want the government to stay out of the economy. Recessions and Crises always increase the size of government.

I believe that we will probably always have recessions, bubbles, and unemployment, not for lack of trying, but for lack of knowledge. Once again, we should try and eliminate them, even if that's true.

"That is what Paul Krugman is arguing is no longer sufficient doctrine for our age."

Brad DeLong with a nice explanatory post on TPMCafe. I'll have a Doppio:

"This discussion has so far one major lack: it does not tell us what "depression economics" is supposed to replace--it does not tell us what non-depression economics is, or was.

So let me try my hand at a definition of non-depression economics.

Non-depression economics believes that:

* Short-run economic policy should be left to the central bank--the legislature and the executive should focus on the long run and keep their noses out of year-to-year fluctuations in employment and prices.
* The highest priority for central banks should be to maintain their credibility as guardians of price stability.
* Once that highest goal has been achieved, central banks can turn their attention to trying to keep the economy near full employment.
* They should try to keep the economy near full employment by influencing asset prices--pushing asset prices up when unemployment threatens to rise, and pushing them down when an inflationary spiral appears on the horizon.
* Central banks should influence asset prices through normal open-market operations--by buying and selling short-term government securities for cash, thus changing the safe interest rate and the price of longer-duration assets.
* Central banks should stand ready to intervene to prevent bank runs. Otherwise, central banks should let the financial sector run itself with a light regulatory hand--financiers can take care of themselves, and the central bank should view itself not as chaperone or duenna but rather as the designated driver in the case of financial speculative excess.

That is what Paul Krugman is arguing is no longer sufficient doctrine for our age."

I think "our age" is grandiloquent. Why is that no sooner do we have a crisis showing the poverty of prediction than people start predicting a whole age ? And, yes, even Paul Krugman's "predictions" seem very general.

"was “in some sense,” i.e. to some extent, the fault of excessively risky lending by Fannie Mae and Freddie Mac. "

I'm having a hard time following this debate because I seem to agree with everyone about something. Lawrence H. White on Cato Unbound:

"Brad DeLong rejects “the claim that the crash in the mortgage market was in some sense( I SAY IN SOME SMALL SENSE ) the fault of excessively risky lending by the GSEs Fannie Mae and Freddie Mac which pulled( I DON'T AGREE WITH THE IDEA OF PULLING ) the private sector along behind them,” based on the observation that “Fannie Mae and Freddie Mac lost market share as all the loans that have now gone bad were made.” Presumably “all the loans that have now gone bad” refers to the nonprime and ARM loans made between 2004 and 2007. He concludes that there must have been “a reduction in demand for Fannie Mae and Freddie Mac’s products” and that “the dominant feature of the mortgage market in the 2000s was not an expansion of supply by Fannie Mae and Freddie Mac pushing their implicit government guarantee past the limits of prudence( THAT WAS THE ENTIRE PROBLEM, NOT JUST HERE ).”

Professor DeLong presents his argument as an application of the logic of supply and demand. But supply and demand curves deal with prices and quantities, not prices and market shares. In a booming market, a declining market share is consistent with a growing contribution to supply (a continuing rightward shift in the firm’s supply curve). His unlabeled chart of market shares, moreover, appears to depict total mortgage market shares, whereas the claim in question is about “excessively risky lending” rather than total mortgage lending.

Fannie Mae and Freddie Mac were in fact expanding their quantities of nonprime mortgages vigorously from late 2004 to 2007. After parsing the GSEs’ financial statements, Peter Wallison of the American Enterprise Institute finds that:

From 2005 to 2007, Fannie and Freddie bought approximately $1 trillion in subprime and Alt-A loans, amounting to about 40 percent of their mortgage purchases during that period. ( THAT'S BAD )

The GSEs thus importantly contributed to the overall supply of nonprime mortgage financing, prompting ( I DON'T AGREE ) mortgage brokers to originate more nonprime mortgages. The increased ability to sell nonprime mortgages to the GSEs and their competitors encouraged mortgage originators to dig deeper into the barrel of applicants to accept more of those previously considered non-creditworthy( THEIR DIGGING DEEPER IS THEIR OWN FAULT. PERIOD. ).

Wallison and Charles Calomiris add that:

Although a large share of the subprime loans now causing a crisis in the international financial markets are so-called private label securities — issued by banks and securitizers other than Fannie Mae and Freddie Mac — the two GSEs became the biggest buyers of the AAA tranches of these subprime pools in 2005-07. Without their commitment to purchase the AAA tranches of these securitizations, it is unlikely( NOT GOOD ENOUGH. A COUNTERFACTUAL ) that the pools could have been formed and marketed around the world. Accordingly( I'M SORRY. THIS DOESN'T FOLLOW ), not only did the GSEs destroy their own financial condition with their excessive purchases of subprime loans in the three-year period from 2005 to 2007, but they also played a major role in weakening or destroying the solvency and stability of other financial institutions and investors in the United States and abroad.

As to total mortgage lending from 2000 to 2005, below is a chart released in 2006 [pdf] by James B. Lockhart III, then Director of the Office of Federal Housing Enterprise Oversight, Fannie and Freddie’s regulator. It shows the steady expansion in their quantities of mortgage-backed securities outstanding through 2005:

Regarding their total portfolios, Lockhart notes:

Fannie Mae’s mortgage assets grew from about $124 billion in 1990 to $905 billion in 2004, and then declined to about $727 billion last year. That’s equivalent to average annual growth of more than 13 percent over the 15-year period. . . . Freddie Mac’s mortgage portfolio grew 26 percent per annum from less than $22 billion at year-end 1990 to $710 billion in 2005. In contrast, the residential mortgage market grew at an average rate of 8.5 percent.

Except for 2004 in the case of Fannie Mae, it is clear that this pattern is not consistent with “a reduction in demand for Fannie Mae and Freddie Mac’s products” dominating over increases in supply. Quantities supplied increased. They especially increased for nonprime products( AGREED ).

It is thus reasonable to think that the crash in the mortgage market was “in some sense,” i.e. to some extent, the fault of excessively risky lending by Fannie Mae and Freddie Mac. Whether or not we call it “the dominant feature of the mortgage market in the 2000s” (emphasis added), it is safe to say that it was an important feature. Fannie Mae and Freddie Mac did push the lending financed by their implicit government guarantee “past the limits of prudence.”( IT WAS A SMALL PUSH. FINE. )

THE IMPORTANT ASPECT WAS THE IMPLICIT GUARANTEE. THE REST OF THE STORY IS ABOUT FRAUD AND IDIOTIC LENDING. NOTHING REALLY RIDES ON FOCUSING ON THIS ONE ASPECT OF THE CRISIS. WE REALLY CAN ALL AGREE ON THIS IF WE THINK ABOUT IT WITHOUT SOME UNSTATED AGENDA.

"The defaults sparked a deleveraging, and the deleveraging destroyed the confidence which was keeping asset prices aloft. "

Felix Salmon discusses the notion of Brad DeLong's missing $17 Trillion:

"But really all finance is a confidence game, and just as Madoff dwarfs Voysey, so do total stock-market losses (in the tens of trillions of dollars) dwarf Madoff's. So long as investors had faith in Voysey, or Madoff, or stocks, everything worked fine. It was only when they tried to take their money out in quantity that things imploded.

Edward Hadas calls this "the noble lie":

The noble lie is the foundation on which all banking is built -- the ability of a bank's depositors and borrowers both to consider the same funds as their own. It's a lie because no bank, no matter how well capitalised, can always let each depositor cash every account...
The fiction of potentially unlimited withdrawal is not limited to bank accounts. Holders of the more advanced financial instruments -- bonds, shares and derivatives -- cannot all sell at once. If more than a few try, the market price drops sharply. If there is a stampede for the exit, the market disappears entirely.

"Stampede for the exit", of course, is also known under its more wonkish name: "global deleveraging". If everybody's selling and nobody wants to buy, what you thought of as wealth -- that number at the bottom of your brokerage statement, whether you have an honest broker or not -- can evaporate with astonishing speed."

I don't think this is a lie. Since it works, it's true. Also, not everyone has rushed to get their money out. But I do agree that it's a loss of confidence. But the loss of confidence was in the power of the government to solve this crisis. Underlying this system was trust, but, ultimately, trust in the government.

This trust in government still exists where it has some determinate meaning, which is why people who have FDIC insured accounts aren't pulling their money out, why increasing the FDIC insurance amount was a good idea, why the Fed paying interest on reserves has led banks to leaving their money there, and why the Flight To Safety landed in US Treasuries. There are other areas as well where the government guarantees are still believed and are effective. In other words, people only trust the banks to the extent that the government is guaranteeing them. This also explains why the Noble Lie isn't a lie: The government has the ability to make everyone whole. The consequences and conditions might be painful and rough, but the government can do this ( One can imagine limits to this statement, but we are very far away from it being operative here, which is why these government guarantees are still taken seriously. )

"Which I think is the answer to Brad DeLong's question of how on earth $20 trillion of wealth has been lost, when total loan defaults are only on the order of $2 trillion. The defaults sparked a deleveraging, and the deleveraging destroyed the confidence which was keeping asset prices aloft."

I agree, but it's a loss in the confidence of government to adequately deal with this crisis. Here we can say that it has become obvious that not everyone will be made whole or even reasonably well compensated. Some people are going to have to take real losses. This loss of faith in the power of government to keep the losses to a minimum is akin to a loss of faith in a creed or mode of life, especially since there was nothing even resembling an alternative. It feels like a loss of faith in a creed after which there are no alternative creeds that can take its place.

"For example: if there's just one person willing to pay $950 for my Google stock, then that's how much it's worth. But if that marginal buyer goes away, and there's a general sentiment that people would rather have cash than Google stock, the price can fall precipitously without much if any news. DeLong tries to model the preference for cash over Google stock as a rise in such things as "liquidity discount" and "risk discount", but that's not how it works in the real world: few people ever bought Google stock because they did the math and decided that the risk-adjusted present value of future dividends was $950. (Especially since Google doesn't pay a dividend.)"

I disagree. There are methods to determine a stock's worth, which, while not without flaws, are very useful. But, in a panic, that worth is worthless.

"Sure, DCF jockeys exist, but they don't tend to be price-setters. Brad DeLong, who's done a lot of original research on the equity risk premium, is basically in that camp: he buys stocks because he has faith in his own analysis. But most of us aren't that clever: we just buy stocks out of some combination of greed and fear (that we won't have enough money to live on, decades hence, if we don't invest our money in ways which make it grow substantially)."

Okay.

"In times of turmoil, we start worrying less about not having enough money in 20 years, and more about not having enough money in 20 weeks. (What if I lose my job? What if my investments fall further?) So we sell our investments."

Sometimes foolishly.

"Can this be modelled as an increase in the liquidity discount? Maybe, but in that case Brad has already answered his own question:

As long as we love our children as ourselves (and most of us do) and as long as we have access to and can credibly pledge collateral for financial transactions (and we can) the magnitude of the liquidity discount should be roughly equal to the technologically and organizationally driven rate of labor productivity growth divided by the intertemporal elasticity of substitution. The technologically and organizationally driven rate of labor productivity growth is a fairly steady 2 percent per year. The intertemporal elasticity of substitution is in the range from 1/2 to 1.

The intertemporal elasticity of substitution might normally be close to 1, but it sure isn't there right now -- not for those of us without tenure, anyway. It came down a lot in the summer of 2007, when the commercial paper market first started seizing up, and it's even lower now. Ask any hedge fund manager dealing with massive redemptions -- it might not be rational to buy with a long time horizon and then suddenly decide to liquidate, but this is not a rational market, and it hasn't been for some time."

This is true.

"There's also a strong feedback loop here. In normal markets, the more that prices fall, the more people want to buy. In financial markets, during a time of crisis, the more that prices fall, the more people want to sell. The intertemporal elasticity of substitution isn't a constant: it's a variable, which falls along with the market. And the people who don't adjust their discount rate fast enough to new realities end up, like Bill Miller, getting crushed."

This is basically the fear and aversion to risk and accompanying flight to safety.

"Especially if you're buying financials and other confidence stocks, you need a lot of other people to be buying them too, otherwise they have a tendency to go to zero. More generally, whenever lenders lose confidence in a company and refuse to refinance its debt, shareholders are likely to find themselves severely diluted at best, and quite possibly wiped out entirely."

Financial Stocks have suffered, like the Bush Administration, from a general feeling that they are being led by incompetent leaders, if not by criminals.

"It's entirely reasonable to draw a distinction between Mr Voysey and Bernie Madoff -- the men with the ignoble lies -- and the more noble lies underlying the stock market. But deleveraging is no respecter of nobility. Which is why all of us are now suffering, not just those who invested with Bernie."

They're both guilty, but one has committed a more heinous crime than the other. However, neither should be let off. Prosecuting some people who have committed crimes is a good way to restore confidence in government.

"Le Citi Toujours Dormer': "I don't know why you use a fancy French word like

Robert Rubin is beginning to be challenged on:
1) His role in Citi's downfal
2) His role in Citi's bailout

I've already posted about him saying:
1) He needs to account for his actions
2) He, at least, admits the CDOs, etc., were meant to be risky.

I don't think he's going to be very happy that Yves Smith is on his case:

"This ought to be a celebratory event, the scrutiny of a powerful player in the financial system who heretofore seemed immune to criticism. And what is interesting about the spotlight on Citigroup consigliere and board member Robert Rubin is that, unlike Greenspan, the reassessment is starting while he would still appear to have his hands on the reins of power. After all, he is still on Citi's board; his protege Timothy Geithner is slotted to become Treasury Secretary, his buddy Larry Summer is head-of-the-National-Economic-Council-in-waiting."

It's a healthy sign, but I wouldn't hold a celebration just yet. Robert Rubin might yet have the last laugh, and, if you don't know, having the last laugh is awfully pleasing.

"Yet if the reaction in New York is any indication, the outrage about the speed and size of the second Citigroup rescue is considerable, and a recent Wall Street Journal piece fingered Rubin as a moving force behind Citi's disastrous strategy to take on more risk in debt markets in pursuit of profit and better competitive rankings. And the only consequences to Rubin will be (hopefully) lasting damage to his reputation. But he gets to keep his cash and prizes."

Yes, Yves, this is where you need to read Kohelet.

"Rubin refuses to take an iota of responsibility for the bank's tsuris (and that also comes from the Goldman playbook. The firm always circles the wagons and admits nothing). Get a load of this:

Robert Rubin said its problems were due to the buckling financial system, not its own mistakes, and that his role was peripheral to the bank's main operations even though he was one of its highest-paid officials.

"Nobody was prepared for this," Mr. Rubin said in an interview. He cited former Federal Reserve Chairman Alan Greenspan as another example of someone whose reputation has been unfairly damaged by the crisis.

Yves here. Unfairly damaged? Is this what leadership amount to in America? You have the power, you get the perks, but you only take credit for the good stuff?"

That's about it. That's the system. I see this playing out like the S & L crisis. A few token prosecutions, but a whole pirate ship full of fraud, negligence, and fiduciary mismanagement will be swept under the rug, to be exhumed long after all the pirates have received their ultimate reward or punishment.

It's a damned shame we can't change it. Still, we need to buckle up. Tough times ahead everyone.

"A very simple psychological construct places people on a spectrum of internalizing versus externalizing (boldface ours):

When something goes wrong, we look for answers as to why-what caused this? How we deal with setbacks has enormous implications for how we feel about ourselves during these difficult times. Some people take the responsibility onto themselves-"it must have been because of something I did or didn't do." We can call these people internalizers because they internalize the responsibility. This can lead to feelings of depression if one's self-esteem takes too much of a beating. However, sometimes there is also the promise of a brighter future-"maybe I can do this differently next time so it turns out better." Other people are more likely to place the controlling factor outside of themselves-"it must have been someone else." We can call these people externalizers. In some cases, they will act out in anger over a bad situation. Externalizing frees them of any feelings of self-criticism or guilt, but it also leaves them powerless over the situation unless circumstances change. So, the price they pay is that they don't learn anything new.

Salesmen are typically externalizers. "

Read Bullshit Artists, veering towards criminals.

"Note the uncanny parallel in word choice with Rubin in this tidbit:

The self-talk of the Externalizer is all about the defectiveness of others and the "unfairness of it all."

Back to the Journal:

Its [Citi's] troubles have put the former Treasury secretary in the awkward position of having to justify $115 million in pay since 1999...

Yves again. Please, his pay should have been questioned long before now. He did not have his name on any deals, and he claims not to have gotten his hands dirty. Indeed, he contends the problem was not the strategy, but the execution, and by implication he had nothing to do with that.

Are we expected to buy that? Did any firm that went out on the risk curve do well? The only reason Goldman was less damaged for a while was that two traders told the management committee that they thought subprime was way overvalued and the firm put on shorts that exceeded its long position. That was serendipity (combined with some intellectual flexibility in the top ranks)."

Dear me, Yves. Don't you know that "When you're slapped, you'll take it and like it." ? I pretty much look like Peter Lorre now, it's happened so often to me. Perhaps we should remember this line more often, "I couldn't be fonder of you if you were my own son. But, well, if you lose a son, it's possible to get another. There's only one Maltese Falcon. ". That's quite true.

"Back to the Journal:

Mr. Rubin said his pay was justified and that there were higher-paying opportunities available to him. "I bet there's not a single year where I couldn't have gone somewhere else and made more," he said.....

Yves again. Yes, and I could make a lot more money dealing drugs, or better yet, providing financing to terrorists (one of my buddies says they make an absolute fortune). The issue is did you deliver value to Citi that bore any relationship to what you were paid? What you could have made elsewhere doing something different is a distraction from the question at hand."

That's not a very good defense. No. When you use that kind of reasoning, it shows you're very bothered by the position you're in as far defenses and explanations go.

"To Rubin again:

Mr. Rubin said it is a company's risk-management executives who are responsible for avoiding problems like the ones Citigroup faces. "The board can't run the risk book of a company," he said. "The board as a whole is not going to have a granular knowledge" of operations.....

They do at Sandater, in fact, they consider that to be the board's most important responsibility. They meet twice weekly. Investment banks, when they were private, had management committees that similarly watched risks like a hawk. So "can't" is counterfactual. "Generally don't" is more accurate. The wipeout in the banking industry strongly suggests that this deliberate inattention to one of the most important determinants of profits and long-term survival was a fatally flawed policy."

Bob needs a little remedial modal logic. And remember:

"Joel Cairo: I certainly wish you would have invented a more reasonable story. I felt distinctly like an idiot repeating it.
Sam Spade: Don't worry about the story's goofiness. A sensible one would have had us all in the cooler. "

"Back to the Journal:

The decision has been blamed in part for Citigroup's problems, including the growth of its CDO holdings amid signs the mortgage market was unraveling. Mr. Rubin doubts that's true. "It was not an inflection point," he said, but "I just don't know what would have happened" if the decision had been different.

At the time, Mr. Rubin was saying in speeches that most assets were overvalued. He would quote a noted investor he knew as saying that "the only undervalued asset class in the world is risk."

Yves again. So he denies that the CDOs or the assumption of more risk had anything to do with Citi's near death experience, despite the evidence in the form of huge writewdown on recent positions. And at the same time he was supporting Citi's bigger bets, he was saying externally, in public, that assets were overpriced and investors were not getting paid enough for risk assumption? It will never happen, but I would love to see a great litigator like David Boies have a go at Rubin under oath."

The noted investor was himself. He has a bad habit of speaking of himself in the third person.

"There is much more in this article, but it illustrates a pathology operative in our society. Why have we gravitated to leaders and advisors who built Potemkin villages and tell us that is progress, and then deny that they have any responsibility? This pattern has become widespread in Teflon CEOs and public officials. And the converse delivers better results. Jim Collins, in his book Good to Great, found that the CEOs of the very best performing companies were modest, shared credit for what went right and took blame for failures, the opposite of the Rubin/prevailing US pattern. And they also paid themselves modestly by modern standards.

Read the entire article, if you have the stomach for it. "

Sorry luv, can't do it. I feel like Tom Waits this morning: "I hate to throw up, it was such a beautiful breakfast and I'd like to hold on it for a little while."

And I think that CEOs talk more like this:

"Kasper Gutman: Well, sir, what do you suggest? We stand here and shed tears and call each other names... or shall we go to Istanbul?
Joel Cairo: Are you going?
Kasper Gutman: Seventeen years I've wanted that little item and I've been trying to get it. If we must spend another year on the quest... well, sir, it will be an additional expenditure in time of only... five and fifteen seventeenths percent. "

As for my blog, I just got the following comment:

"By Gad, sir, you are a character. There's never any telling what you'll say or do next, except that it's bound to be something astonishing. "

Here was my comment on Yves Smith's blog:
Don said...

I've noticed a change in the portrait of Rubin in the ongoing series of stories featuring him.

Last week, he was portrayed as having understood clearly that these new financial innovations were based on increased leverage and risk. In fact, he said that is how investors make more money. Which is true, but doesn't justify these particular products. However, in admitting that, say, CDOs are meant to push the envelope of risk for more profits, he did manage to clearly state a fact that many people are trying to deny in justifying their investments. Many people are trying to claim that they saw these investments as less risky.So, I found Rubin's admission very valuable.

Now, he seems to be focusing less on the risk of the products than on the financial crisis we are in, and saying that no one could have predicted the crisis we're in. However, even if that's true, it doesn't deny the fact that Citi's investments are part of the root cause of the current crisis, which are poor loans and over-leveraged investments. In other words, as he said earlier, pushing the envelope on risk.

I don't see it working, precisely because of the Citi bailout. From my perspective, he was clearly a believer in the view that if there was a financial crisis, the government and Fed had implicitly and explicitly agreed to intervene in a financial crisis, and save the major financial institutions. It is this belief in a guarantor which helped the big guys to laugh in the face of ultimate moral hazard. So, he's correct. He never predicted this. He never predicted this reaction by citizens to this bailout. After all, it was part of our system, and what we have now is just the guarantors of the system, taxpayers, paying the bill. How can he be blamed for clearly seeing how the system works, while the rest of us do not?

Don the libertarian Democrat

November 29, 2008 11:07 AM

Now, Matt Yglesias weighs in:

"Robert Rubin speaks up for himself:

“Nobody was prepared for this,” Mr. Rubin said in an interview. He cited former Federal Reserve Chairman Alan Greenspan as another example of someone whose reputation has been unfairly damaged by the crisis.

This seems like a pretty serious dodge here. Presumably the reason the top executives at a giant financial services firm get paid such extravagant salaries is that it’s their job to be prepared for the stuff that “nobody” is prepared for. If the idea is just that you make money while the market goes up, and then when the market goes down the government steps in to rescue you, probably a lot of people could do the job. And if a lot of people could do the job, there’s no need for compensation packages to run into the tens of millions of dollars. But if there is a need for compensation packages that run into the tens of millions of dollars, then people have a responsibility to prove themselves to be super-genius titans of capitalism who can navigate the shoals of the global economy flawlessly.

I don’t, personally, believe that there’s anyone like that out there. So nobody should be blamed for failing to live up to that hype. But people can be blamed for participating in the hype and profiting from it."

Nobody means " Mr. Nobody". He's saying, "Go talk to Nobody, he was prepared. Go and see how he knew, but get off my back. I'm not Nobody!".

Then let's give him a proper blaming:

"You... you bungled it. You and your stupid attempt to buy it. Kemedov found out how valuable it was, no wonder we had such an easy time stealing it. You... you imbecile. You bloated idiot. You stupid fat-head you."

Now, do we all feel better having assigned blame?

Brad DeLong gave a rousing defense of Rubin, which nobody, again nobody, seems to be buying. How could they? They're broke. I understood DeLong's defense to be that Rubin was paid to take risks. Very Good.

"You know, that's good, because if you actually were as innocent as you pretend to be, we'd never get anywhere. "

Here's a comment I left on his blog:

"Your defense of Sec. Rubin reminds me of a lesson I learned many years ago while playing Babe Ruth League baseball.

In a tied game, with two out, in the bottom of the last inning, I was on third base. I came up with a brilliant, if risky, plan, all on my own. I decided to steal home.

Now, I was pretty fast in those days, and I knew that my decision was the last thing anyone expected, so I convinced myself that it was a brilliant and foolproof plan.

I was thrown out. When I got to the dugout, the coach said, " What the hell do you think you were doing? ". I said, " Trying to score a run and win the game, that's my job". He replied, not that impressed, "It's not your job to be thrown out in an idiotic play".

Well, true enough. I'm not equating my risk with Rubin's, but I did learn one thing that day when we lost. That was to take responsibility for your own risks. Period.

Posted by: Don the libertarian Democrat | November 24, 2008 at 09:49 AM"

"The best goodbyes are short. Adieu. "