This is the thing I’ve been afraid of ever since I realized that Japan really was in the dreaded, possibly mythical liquidity trap. You can read my 1998 Brookings Paper on the issue here. Seriously, we are in very deep trouble. Getting out of this will require a lot of creativity, and maybe some luck too.

   Paul Krugman, The New York Times

the Fed is scared.

update 20081217 1401 EST: reaction to the Fed decision from Germany.

update 20081217 1516 EST: where we have to go.

yup, that's W.

see CalculatedRisk for the details.

... And if this crisis kills Real Business Cycle theory, as it surely should, it cannot be all bad.

Yet I can’t get away from this feeling of inadequacy. One might not expect much from economists, but one would surely expect them to warn us of a crisis on this scale.

that's Martin Wolf in a great confessorial post. he's got a lot more to say there.

on the same topic, Paul Krugman basically echoes Professor Sheila Widnall's sentiment that There's nothing more dangerous than a close call: If you get away with it, it's OK next time; past successes may be the first step toward future failure.

"These public-private partnerships are very, very dangerous. The most rotten part of the financial system in the US consisted of the government sponsored entities, Fannie Mae and Freddie Mac. They really kicked off this crisis. The state should set the rules and enforce them -- but not become involved as a market player...

If Obama is wise, he will find common ground with China to solve this crisis. If he wants to do it alone, we will go into a worldwide depression because America is not in a position by itself to clean up the mess it created."

-- George Soros, 2008-11-24, Spiegel Online

this figure from Election Maps 2008 is evidence in favor of a hunch i have, that sharp edges in data graphics convey more significance to the brain than they should. blending is better, i suspect.

the first is an election map of counties with pro-McCain as red, pro-Obama as blue, but smoothed so close ties are purple.

the cartogram beneath it rescales areas to be in proportion to population. the traditional map misrepresents large sparsely populated areas of territory. this misrepresentation goes back at least as far as How to Lie with Statistics, in its comments on "The Darkening Cloud", a (Newsweek? Time?) graphic which purported to show how much of the annual national income was being consumed by taxes.

Pharyngula talks more about this.

contrary to much rhetoric, there are key roles for government in a free market system. some of these roles are, in fact, "anti-roles", meaning things which, on an ordinary day, government does not do. here are four.

• guarantor of contracts: i mean here "contracts" in the most general sense, be they promises between parties to fulfill obligations, or obligations members of the country, community, and society have to it, whether directly or to their employees. if a party or corporation fails to fulfill its contractual obligations, government must step in and enforce the terms or penalize the offender. otherwise, free market competition is dead, because cheaters on terms can always underbid honest and productive competitors.
• assuring a level playing field: this means government does not fund failing participants, and it means government does not prohibit "tainted" buyers from acquiring assets. if a government bails out or supports failing market participants, it is penalizing successful ones, as well as the general taxpayer who gains no advantages from this intrusion. if a government prevents anyone from acquiring assets, they are disrupting and intervening in an investment which could greatly help.
• minimizing excessive government regulation and taxes, but being fair with those which exist and are sought: government regulation which exists to benefit an entrenched business or competitor is useless. regulation which promotes the common good can be useful. government has important functions, and these need to be funded. taxing below the level needed to support these is foolish and dishonest, and will eventually have consequences. most importantly, taxes should be predictable and fair.
• guaranteeing the premises of a free market: these are unimbeded movement of capital, equity, and labor across political boundaries, irrespective of the perceived consequences. you don't have a free market if labor can't flow as freely as cash. if labor flows, government must assure that the benefits due to labor in their country are extended to everyone coming cross border to work, lest their be price distortions.

there are very amusing and entertaining comments about the Treasury's rescue of AIG up at the entry on CalculatedRisk about it.

i gotta agree with a lot of them: here's the professedly and supposedly most "conservative" Republican administration in a bunch of years, either forced by political expediency or central ineptness to get into the nationalization game comparable to a thoroughly socialist government. what some people will do to bailout their friends?!

actually, i think it's all about politics: for they know if any one of these cascades, Republican chances for the presidency and Congress are thoroughly hosed.

the United States as a third world debtor: could be that way soon.

update: it's gonna get worse. Roubini may have seemed extreme once upon a time, but now he seems prescient.

great trio of articles from The Economist's print edition this week:

• "Unhappy America"
• "Workingman's Blues"
• "It’s the economy again, stupid"

(music to accompany, 2 MB)

so Paulson and crew are handing Freddie and Fannie a 'get of jail free' card. Willem Buiter is not happy:

There are many forms of socialism. The version practiced in the US is the most deceitful one I know. An honest, courageous socialist government would say: this is a worthwhile social purpose (financing home ownership, helping my friends on Wall Street); therefore I am going to subsidize it; and here are the additional taxes (or cuts in other public spending) to finance it.

Instead the dishonest, spineless socialist policy makers in successive Democratic and Republican admininstrations have systematically tried to hide both the subsidies and size and distribution of the incremental fiscal burden associated with the provision of these subsidies, behind an endless array of opaque arrangements and institutions. Off-balance-sheet vehicles and off-budget financing were the bread and butter of the US federal government long before they became popular in Wall Street and the City of London.

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So let’s call a spade a bloody shovel: nationalise Freddie Mac and Fannie May. They should never have been privatised in the first place. Cost the exercise. Increase taxes or cut other public spending to finance the exercise. But stop pretending. Stop lying about the financial viability of institutions designed to hand out subsidies to favoured constituencies. These GSEs were designed to make losses. They are expected to make losses. If they don’t make losses they are not serving their political purpose.

So I call on Secretary Paulson, Chairman Bernanke and Director Lockhart to drop the market-friendly fig-leaf. Be a socialist and proud of it. Come out of the red closet. The Soviet Union may have collapsed, but the cause of socialism is alive and well in the USA. Granted, the US version of socialism is imperfect thus far. The federal authorities have mainly intervened to socialise the losses in the financial sector while allowing the profits to continue to be drained off into selected private pockets. But that is bound to be an oversight. It surely cannot be the intention of such committed Marxists to target taxpayer-funded largesse solely at the very rich and at a few favoured, electorally sensitive constituencies. Fannie and Freddie are, or will be, safe in the hands of comrades Paulson, Bernanke and Lockhart.

of course they are hypocrites: they are in an exquisitely hypocritical Republican administration, one which has made deception its key calling card.

click this link to see the blog entry. sorry, but LJ was broken when i wrote this, and i got tired of waiting for them to fix the damn problem. below is an image of the entry.

relationships are in actuality variably nuanced, and the variation is temporal as well as organic or logistic. that's one of the most interesting things about them, that each of the partners don't stay put, responding not only to the other but to friends and the world. so, i wonder how really pertinent economic models of mating are. they tend to be stationary models. of course, there's been a lot written about this, and a lot written about the efficacies or detriments of the online dating thing, per singles.net or mate1 or facebook or the formulaic eharmony.com. but there are very few new ideas, surely few with deep insights into meeting and mating.

until now.

there's checkmyradar, a powerful new and civilized way to meet up and hook up, better than relying upon the crashing into others at groceries, or in the bar scene, or on the dance scene. what's great about it is how it's really all about you. well, about you and your friends, your circle. you do with it what you want, what your friends want. it converts hints and winks into Actionable Contacts. how?

the Harvard Crimson spent quite some time today explaining how.

so, the deal is, explained better there, that meetups and dates are a breath away from a wide world of "almost" and "nearly" and "maybe" and "gee i wish". that world, today, in person or with conventional dating sites, is completely unexplored. checkmyradar gives you binoculars and maps.

check it out. be a pioneer. be adventurous. even Sex and the Ivy hasn't heard about this one yet.

update 20070503: y'know, Check My Radar is less a dating site than a social experiment.

trackback

Randolph Harrison takes on the Second Life economy and then asks "Are Second Life 'Businesses' Worth Anything?"

yeah, he's basically about right, especially regarding enforcement of contracts. the only players who have status are "land" owners who really own a piece of SL, and who the Lindens make comfortable.

ponzi scheme?

maybe. there are some "products", but they are insubstantial. people do work for essentially nothing, and the SL world resists any effort to impose real world prices.

with these distortions, it's hard to know what to sell to people or what people care about.

i think the most revealing things about SL and its economy are said in the comments to Harrison's second blog entry.

update. Linden Labs has apparently invited the FBI to investigate establishments in its world, notably the gambling ones and others. it would be nice if the Lindens were as concerned about fraud as they are about wholesomeness and morals.


thanks to Dave Galkowski for providing the original link to Harrison's blog entries.

in this season where people really indulge in the National Religion -- which is unquestionably shopping -- there's controversy in the blogosphere today about schools and classrooms receiving free DVDs.

Laurie David at The Washington Post proffers her read of why the National Science Teachers Association ("NSTA") refused 50,000 free copies of "An Inconvenient Truth" for showing to students, her conclusion being they feared reprisals in the form of withdrawals of donations from Exxon Mobil. Exxon Mobil has a documented campaign to disrupt a public consensus on global climate change for fear of its impact upon business. Ms David is producer of "An Inconvenient Truth". thanks to the MoJo blog for highlighting this.

then Ars Technica reminds us of another failed attempt on the part of ID apologists to include their swill in classrooms, this time by donating a "teaching pack" including DVDs and manual to UK schools.

considering that the Holy National Religion of Shopping is driven by the collective desire to get things as cheaply as possible, the RIAA oughtn't seem so surprised when students and others prefer free downloads to paying full and outrageous rates for their pieces of plastic. i mean, my sons were in line at the local Circuit City at 0430 EST Friday to get some bargains. reportedly, the line ahead was 600 deep, full of high school- and college-aged people seeking to get as much for their money as possible. i call that initiative, and free, uh, enterprise.

sage words, reposted from the Financial Times, who, in turn, ripped it off from Berkshire Hathaway:

Memorandum

To: Berkshire Hathaway Managers ("The All-Stars")

From: Warren E. Buffett

Date: September 27, 2006

The five most dangerous words in business may be "Everybody else is doing it." A lot of banks and insurance companies have suffered earnings disasters after relying on that rationale.

Even worse have been the consequences from using that phrase to justify the morality of proposed actions. More than 100 companies so far have been drawn into the stock option backdating scandal and the number is sure to go higher. My guess is that a great many of the people involved would not have behaved in the manner they did except for the fact that they felt others were doing so as well. The same goes for all of the accounting gimmicks to manipulate earnings – and deceive investors – that has taken place in recent years.

You would have been happy to have as an executor of your will or your son-in-law most of the people who engaged in these ill-conceived activities. But somewhere along the line they picked up the notion -- perhaps suggested to them by their auditor or consultant -- that a number of well-respected managers were engaging in such practices and therefore it must be OK to do so. It's a seductive argument.

But it couldn't be more wrong. In fact, every time you hear the phrase "Everybody else is doing it" it should raise a huge red flag. Why would somebody offer such a rationale for an act if there were a good reason available? Clearly the advocate harbors at least a small doubt about the act if he utilizes this verbal crutch.

So, at Berkshire, let's start with what is legal, but always go on to what we would feel comfortable about being printed on the front page of our local paper, and never proceed forward simply on the basis of the fact that other people are doing it.

A final note: Somebody is doing something today at Berkshire that you and I would be unhappy about if we knew of it. That's inevitable: We now employ well over 200,000 people and the chances of that number getting through the day without any bad behavior occurring is nil. But we can have a huge effect in minimizing such activities by jumping on anything immediately when there is the slightest odor of impropriety. Your attitude on such matters, expressed by behavior as well as words, will be the most important factor in how the culture of your business develops. And culture, more than rule books, determines how an organization behaves.

Thanks for your help on this. Berkshire's reputation is in your hands.

(emphasis added)

i enjoy Robert Reich's commentaries on Public Radio's Marketplace. for instance, in this installment, he talks about how American corporations are abandoning Americans for Asia. no news there. but what they are doing is investing heavily in Asia countries, communities, and their educational systems instead of, as Reich suggests, beating on Congress to provide funds to make Americans more competitive.

IMO it's not just big bad corporations that are at fault here. Congress has been increasingly stingy since 1994, under the mandate of "shrinking government". thus, if a corporation is seeking advanced and smart technology and science and Congress has a big No Spending sign up at its door, it may be a rational move to seek other sources. and, if other companies are already doing this, well, it's just easier for you to do it.

parochial attitudes in education and with respect to Americans' place in the world surely doesn't help. for one thing, most people in other countries speak more than one language. Americans fiercely insist upon English and only English in their own country. that's fine, but it translates into not taking language learning seriously and, so, limiting ourselves in international business.

The Economist asks why economists, those intellectual and rational folk who purportedly know which way is up and the value of time and money, spend so much time blogging? the answer says as much about blogging today as it does about economists.