Monday, July 26, 2010

The Illustrated Guide To Larry Summers' FinReg Hypocrisy And Hallucinations

A few days ago I posted a video of Larry Summers talking about FinReg on CNBC with Maria Bartiromo. At the time, I was content to simply post the video with some snide remarks about what a devilish doofus and utter cad the man was, leaving it up to the reader to watch the video and see how obviously arbitrary and self-serving his opinionating on the subject was.

Alas, it seems that with the clarity of retrospect I see now that I misjudged the psychic value I would derive from leaving the video up without specific comment. It turns out I misjudged my future value system (insert statist/interventionist guffaw here, along with requisite claim that this situation highlights the need for a monopolist regulator who could smooth out market inefficiencies, failures and information asymmetries) and I have no choice (!!, double guffaw) but to present to you now a series of nearly verbatim (I might have blown a preposition or tense here or there) transcripts of The Sleepy One's comments to the Money Hunny, along with my very own color commentary. Let us begin:
It's the most important Wall Street reform legislation in 75 years. It will substantially reduce the probability of another financial crisis. It will eliminate the prospect of large-scale federal bailouts of the kind we were forced into a year ago. And it will change the financial life of every American household by forcing the right kinds of protections and restrictions on egregious credit card practices, on mortgages that have exploding and unfair terms, on payday loans and other means in which consumers have been taken advantage of.
This one is just hilarious. Summers is going to be eating these words for the rest of his life.

We're on the verge of Re-Depression 2.0, so Summers' calculation that this will "substantially" reduce the probability of another financial crisis demonstrates that Summers either doesn't understand what the word substantially means, or else he doesn't understand what generates business cycles. Another option is that both of these are true.

The federal bailout "clause" in his defense is based on the premise that the federal tax-funded bailouts of the financial industry were "necessary and proper" (having fun with Constitutional/legal language here, if you can't tell). Of course, they were neither. They may have been politically necessary lest the criminal scumbag politicians be voted out for not "doing something" but they were not economically necessary. In fact, they were highly economically improper, as they prevented in large part the self-correcting mechanism of the market place from operating and cleaning out all this much bewailed and bemoaned toxicity still lying semi-dormant in the financial system.

The last bit is just political demagoguery. "Unfair" is a relative term and it leaves the door open for all kinds of bureaucratic intervention, all manner of which will be entirely arbitrary and entirely ruinous to the operation of free markets everywhere. Credit cards and payday loans had nothing to do with the cause of this crisis, that part of FinReg was simply a way to buy some votes of angry, entitled, tapped out voters. Similarly, the mortgage debacle was a symptom, not a cause, of the financial crisis. The crisis itself was caused by the Fed.

Curious, no mention of the Fed so far. Moving on:
You know if you look at the financial history of this country we had a catastrophe in the 1930s. We put in place a system of regulation that really set that right. We went a long period with almost no, major, financial incident, but in the last 20 years we've seen one almost every 3 years: the S&L debacle of Mexico, LTCM, the NASDAQ Bubble and so forth. And so we clearly had a major task to do, which was to put in place a regulatory system which was updated to keep pace with the pace of innovation in the markets. That's what the framework put in place today has done. It's a huge achievement for the country, it reflects enormous leadership and hard work of many people, the President, who was talking about this in a major way in campaign speeches, an unlikely subject in campaign speeches, long before the Lehman crisis happened.
Summers proves he is no student of US or even global financial market history with this one.

He also misinterprets his selection-bias riddled data set and draws "clear" conclusions that should, in fact, be highly controversial. Namely, all of these debacles he mentions (and MORE!) can be directly tied to a preceding government intervention or central bank policy action as the ultimate cause. Yet, what conclusion does Summers arrive at but that all of these situations "clearly" demonstrate a more urgent need for more of the same interventions and narrow-minded policy measures that got us all into the mess we find ourselves in today. Could his theorizing be any more self-justifying and self-serving?

But that self-serving takes a back seat to his disgusting political genuflecting for Master Obama. Good gracious, if we had only recognized the visionary leadership of that young, upstart senator and Marxist community organizer from the state of Illinois and elected him to the newly created position of Emperor For Life when we had had the chance, none of this would have ever happened! May we be a little wiser, next time... even though there PROBABLY won't be a "next time", financial debacle-wise, because as Mr. Summers has already pointed out this whizbang FinReg stuff really socks it to impending financial meltdown-causing bacteria and viruses.
My friends in the business community sometimes like to try to have it both ways. They're for standards, for clear standards, but then if they don't like the standards, they're for regulatory discretion in a lot of areas, the Volcker Rule for example. It was business that was working very hard to get regulatory discretion and to avoid detailed statutory mandates.

So, I think it's a little rich for them to complain that there is now a certain amount of regulatory discretion.

Look, there's things Congress should not do. Congress doesn't know the details of the circumstances of an individual financial institution, those are enormously technical areas. So there needs to be discretion; discretion circumscribed by a framework; a framework that rules out the prospect of a taxpayer bailout; a framework that provides for resolution authority; a framework that insists that things that can be put on clearinghouses and exchanges be put on clearinghouses and exchanges; a framework that insists that every systemic institution, if you're big enough to bring down the system, you're big enough for someone to regulate you comprehensively.
You're right Larry, that IS rich! But not for any of the reasons you just mentioned.

First, let's consider what kind of person in the business community would be a "friend" of Larry Summers', metaphorically or otherwise. This would probably be a person who has been sucking on the government's teat to ensure they are always pulling those big, bottom-line surprises out of their hat at the end of each quarter for SO long that when their parents bring them to social events and explain their child-raising lifestyle choices to other partygoers, the average Jane becomes pretty alarmed and has to slap her husband across the face a few times to remind him that it's not polite to stare, especially at a fifty-year-old woman breastfeeding a teenager.

In other words, these businessmen friends of Larry are not the kind of businessmen you and I are familiar with-- you know, the kind that have to manage consumer preferences and costs of doing business as they quest after profit, the whole time exposed to the possibility of loss and financial ruin. Instead, they are members of the political entrepreneurial class who are so dependent on their government mommy's tax-financed plastic surgery-enhanced breast-milk that they'd soon die without it. But not before throwing one hell of a noisy, pathetic tantrum, first.

Okay, now that we've got that out of the way, let's consider what else is rich about Larry's latest observation. How about... Larry Summers and all the other assorted politicians who helped put it together as well as the bureaucrats at the various agencies tasked with interpreting FinReg and "fleshing it out"?

Yeah, little Larry is going to be riding that revolving door between government "service" and political consultancy like a turbocharged merry-go-round, and you can bet there are more than a few booze-and-sex-filled Bermuda cruises for the agency task force personnel charged with interfacing with 202's greatest lobbyist minds being finalized in the government relations departments of major Wall Street firms as we speak.

Question to Larry: if Congress can't properly regulate an individual financial institution due to "enormous" technical difficulties, how in the eff are they supposed to figure out an entire industry, like finance, or an entire economy, like the United States'?

Don't bother getting back to me with an answer, by the time you figure it out more than a few years will have passed and in the land of ObamaCare I'll surely be dead.
If you're worried about uncertainty, the people who decided to make 10s, if not hundreds of billions of dollars of subprime loans, and they're saying the uncertainty is about what the government is going to do? People have off-balance sheet SIVs where they can't even calculate what the total extent of their liabilities are, their uncertainty wasn't caused by the government. Their uncertainty was protected by what the government did, by the fact that those institutions were facing, in many cases, catastrophe.

And the government, NOT to help them, but to protect the system, did what was necessary to take what was a tale, of literally a depression, out of the market. That's the important thing that's happened about uncertainty.
I fear I am echoing myself here but, if financial institutions can't know what they're holding and calculate what it's worth, what hope do regulators have?

'Course, that's not the point-- that was just a red herring lightfoot Larry came up with to distract from the real issue, that being that the government IS causing massive uncertainty in the financial markets and real economy. Will there be another stimulus bill or not? If so, how much and who gets the money? Will the Fed be accomodative or complacent? Will the government allow the market to deflate or try to fight it with occasional, hyperactive bouts of inflation along the way? Will Congress pass more, moronic laws aimed at micromanaging everybody else's business while their various and growing ethics violations multiply or will they all sleep-in one morning after a lobbyist-financed night of coke and hookers on K Street and leave everyone alone for a change? Etc. etc., ad infinitum ad absurdum.

Again, Larry tries on a bit of politicized, revisionist history, where in this version of the story the government was NOT, I repeat, and emphatically so, good sir, NOT, bailing out connected cronies on Wall Street, but was in fact the knight in shining armor of the good, honest people of Main Street USA. 'TWAS FOR YOUR OWN GOOD, I MIGHT ADD, PAL!
Look, Maria, what am I going to do, give you a number [for what bank capital ratios should be in the future]? It's a very complex subject.

I will say this: it's clear that there wasn't enough capital in the system and there was too much leverage before. And it's clear that whatever we do we're going to need to do in a way that recognizes that we've got a recession from which we have to recover and that's going to depend on a strong flow of credit. And so, assuring a strong flow of credit, but getting to healthier, better capitalized institutions, that's the tradeoff we're going to make on Basel.
Ha, Maria baby, please, what do you want me to do get my little calculator out and do some math for everybody? Please, ya wastin' my time!

Of course, yes, that is exactly what we'd like you to do, Larry. Do your little calculation and show it to us so we can all check your math and make sure there was nothing arbitrary or subjective about the process.

Like all pseudo-economists, Larry is all about the tradeoffs, but he's also all about the free lunches (which don't exist). And what he's REALLY all about is not disclosing how he arrives at the tradeoffs he ultimately decides to make.

Hmmmm, we need more credit which requires more leverage, but we also need more capital, hmmmm, hmmmm, how to solve this puzzle, how to "tradeoff" between these two, seemingly mutually exclusive needs. Methinks some money-printing might not be far off in mine future!
We're determined, the President has said it many times, to do what's necessary for growth. The fact that it happened too late, it happened too slowly, but the fact that Congress is at last extending unemployment insurance, looks like it is on the verge of providing new credit and tax incentives for small business, it's starting to move on a broader range of programs to support energy, remembering the needs of state and local governments.

All of this will contribute to supporting and extending the momentum of growth. This is an economy we're watching very closely and we'll do what's necessary.
Larry Summers apparently does not subscribe to Ben Bernanke's tweets. The man still thinks there are green shoots out there and that it's appropriate to talk about shepherding their growth and development into big, strong economic oak trees. Little does he realize that "momentum" is a term borrowed from physics and it is not necessarily positive in value. Consider: what is the momentum of a massive object with negative velocity?

Haha, idiot. (Sorry, couldn't help myself.)

The last bit about necessity is, as you can see, a recurring theme in Larry's Logic. It's also probably the most horrifying part of the plan. Remember, the way it should read, if Larry were a bit more into honesty than he actually is, would be:
We'll do what [we think] is necessary.
As for what Summers and Co. think is necessary, don't bother him with requests for specific details, like what bank capital requirements should be. Instead, let him sleep on it, and together we can all cross that bridge (with the help of a friendly, well-groomed, handsomely suited financial lobbyist) when we come to it:

One last question, before I go, but...

Is it just me, or does Larry Summers have a more-than-merely-striking resemblance to South Park's wunderkind mystery sleuths, the Hardly Boys?

Eh? Huh? No? Just me? Well, alright then.

With that, I bid you adieu in the immortal style of Larry Summers at the end of his nearly 10 minute long propagandizing, dissembling "interview" with Maria "Mouthpiece of the Markets" B, in what can best be described as the awful love child of an Eastern New England accent and the tone of a person who has zero respect for the annoying person they have just finished talking to:

Witchdoctor Brad DeLong: No Theory In My Economic History Stew

Brad DeLong is out admitting to, in a fairly non-controversial, non-scandalous manner, something I've been claiming over and over on this blog in repeated profiles-of-thought-as-expose-- that most people carrying the title "economist" are either mystic politicians or confused, principle-less statisticians. To wit:
One of the embarrassing dirty little secrets of economics is that there is no such thing as economic theory properly so-called. There is simply no set of foundational bedrock principles on which one can base calculations that illuminate situations in the real world. Biologists know that every cell runs off instructions for protein synthesis encoded in its DNA. Chemists start with what the Heisenberg and Pauli principles plus the three-dimensionality of space tell us about stable electron configurations. Physicists start with the four fundamental forces of nature. Economists have none of that. The "economic principles" underpinning their theories are a fraud--not bedrock truths but mere knobs twiddled and tunes so that th right conclusions come out of the analysis.

What are the "right" conclusions? It depends on what type of economist you are, for three [sic] are two types. One type chooses, for non-economic and non-scientific reasons, a political stance and a political set of allies, and twiddles and tunes their assumptions until they come out with conclusions that please their allies and their stance. The other type takes the carcass of history, throws it into the pot, turns up the heat, and boils it down, hoping that the bones and the skeleton that emerge will teach lessons and suggest principles that will be useful to voters, bureaucrats, and politicians as they try to guide our civilization as it slouches toward utopia. (You will not be surprised to learn that I think that only this second kind of economist has any use at all.)
I'll keep hammering these fools to pieces as I come across them. In the meantime, Rizzo does a good job of reducing the intellectual structure of DeLong down to size:
What are the principles according to which data are constructed? What are the factors or standards by which some events are chosen as relevant? These are theoretical issues. In an important sense the carcass, the boiling, and the pot itself are creations of theory.

Since the second type of economist is impossible, the reality is that the two types of economists to which DeLong refers are really the same: ideologues masquerading as scientists. In DeLong’s world: Either you consciously and deliberately distort science for extra-scientific purposes or you unconsciously distort it for non-scientific purposes. Either you are an explicit ideologue or an implicit ideologue.

The implicit ideologue deceives himself as well as others. He acquires his ideology as a result of prejudices, psychological needs, fantasies and so forth. Although the deliberate deceiver is morally reprehensible, the implicit ideologue is pathetic and perhaps more dangerous because he really believes he is objective.

Fortunately, science is possible. It need not be either explicitly or implicitly disguised ideology.

We have learned more about how Brad DeLong practices economics from the above quotation than we have about the discipline of economics.

Friday, July 23, 2010

Larry Summers On FinReg

Old Larry, looking especially creepy and uncomfortable and sounding especially incoherent and arbitrary, here. He even gets snappy with Maria "Mouthpiece of the Markets" Bartiromo and accuses her of something that could best be described as "market demagoguery", apparently incensed that she would do so only to interrupt his political demagoguery, which is completely classy and called-for.

Thanks to the tight cropping of the camera, we're not able to see the loaded gun that is being held just off-screen, pointed directly at Larry Summers' head, but the anxious, nervous hesitancy in his voice is literally all the confirmation we need that he is delivering these lies and blandishments under severe duress.

Keep dissembling, Larry, it's the only thing standing between you as you are now and you as you might be after the Obama-cult takes you out to the political pasture. That is, if they're so generous. Far more likely that Rahm is in the workshed putting together some .22LR reloads as we speak, just itching to get the call that says he can take you out behind the barn and put you down like he would with any other sick, frightened, injured farm animal that's no longer useful and has become simply another costly burden to ol' Farmer Obama.

Wednesday, July 21, 2010

Ben Bernanke's Wonderful Flying Market Machine

Check out the results of Bernanke's confidence-inducing speech today:

Great work, Ben!

I think this video captures the plight of the average investor quite nicely. Notice the sound of the monetary pumps "priming", giving the rider a false sense of security on his inflatable fun-raft of a market, right before he promptly nosedives into the surface tension of the deflationary lake abyss, breaking his neck (perhaps once and for all?).

Tuesday, July 20, 2010

Some Charts, Some Comments

(Click any chart to enlarge)

Piles of garbage

Dream receipt projections, real outlay nightmare

Postwar bank asset composition, Treasury holdings at all-time historical lows

Saturday, July 10, 2010

Tyler Cowen Officially Joins The Ranks Of Pseudo-Economists Everywhere With LeBron Remark

Suddenly, all of the zany things Tyler Cowen has been saying lately about economics, free markets and the libertarian political theory derived from the two, makes perfect sense-- Tyler Cowen is not an economist, but a pseudo-economic utilitarian. In a recent interview at NPR, Cowen gave his thoughts on where LeBron James should've gone for "maximum utility"... notice his suggestion is not the same as the ultimate decision James himself made by following the "dictates" of the market:
LeBron, for added utility, should have gone to the New York Knicks. Because that's a big city with a terrible team, and they would have enjoyed him quite a bit. Number two choice would be Chicago. It's a big city. It's not a terrible team, it's a good team. He would have made it much better, maybe won a championship.

But to send him to Miami is almost the place that brings the least additional utility to the United States, as far as I can see. ...

They were already enjoying Dwayne Wade. Now they have three stars, and they’re not going to get three times the pleasure.

...who were the two players who handled the ball most lsat year? Numbers one and two were LeBron James and Dwayne Wade. So you don’t play the game with two balls. ... You would actually have more total social happiness if they played in two cities.
Message to Tyler Cowen, pseudo-economist: utility is not determined on some kind of aggregate level or by some majoritarian standard. No comparison can be made between the utility derived from three people who don't like basketball much watching LeBron play, and two watching him who are super big fans. The best and only interpersonal value comparison that can be made is that of observing value on a free market via money prices.

According to that comparison, it's clear LeBron made the right choice and will consequently maximize utility with his decision. And while LeBron is playing great basketball with his league-mates to the cheers of a thankful crowd of paying fans, Tyler Cowen will still be a pseudo-economist fraud of very "marginal" utility to the rest of society.

(Grazie mille to Skip Oliva for the link.)

Thursday, July 8, 2010

Lebron James, Gold And Hyperinflation

The National Inflation Association is advising Lebron James to negotiate a three-year contract and put his assets into gold to protect himself against the increasing risk of hyperinflation:
NBA salary inflation has averaged 11.74% annually over the past 25 years compared to an average U.S. price inflation rate of 7.88% and an average U.S. CPI index growth rate of 3.03%. NIA estimates the real rate of U.S. price inflation to currently be around 5-6%, but NIA projects to see a breakout of double-digit price inflation within the next two years. If Lebron James signs with the Cleveland Cavaliers, his salary increase will be limited to 10.5% per year and if he signs with any other team, his salary increase will be limited to 8% per year.

Coming up this September, the latest doubling of the U.S. national debt will have occurred in just seven years. The previous doubling of our national debt took place in thirteen years. Even though Lebron James' annual salary increase of 8% per year (if he signs with a new NBA team) will be in line with the average annual rate of real U.S. price inflation, NIA projects a very minimum of a doubling of U.S. price inflation over the next five years because it will be impossible for the U.S. to keep up with rising interest payments on our national debt through taxation.

It was just announced on Wednesday that the NBA salary cap for the upcoming season will be $58.044 million. Based on this cap, the maximum salary for the first year of Lebron James' contract can be $17.4 million. Assuming that Lebron James signs with a new NBA team, the final year of a maximum five year contract has the potential to be worth $23.67 million. However, if the U.S. experiences an average price inflation rate of just 15% over the next five years, the final year of Lebron James' contract will only have the purchasing power of $11.76 million in today's U.S. dollars.
Read the rest. Thanks to Bob Unger for the heads-up.

Wednesday, July 7, 2010

The Corporation Is Responsible For The Enlightenment

So argues Gonzalo Lira in a new article entitled "Why Corporations Matter, Part I" that has been picked up by It's a mix of economics, history and epistemology and it's quite fascinating. Here's a teaser:
The Antikythera clockwork was a mechanical device, made of bronze and iron gears, that was manufactured by the ancient Greeks in the second century B.C. It was lost in a shipwreck around 150 B.C., and recovered from the bottom of the Mediterranean in 1900. But it was only in the last couple of decades, with the help of sophisticated imaging equipment, that scientists have realized what the rusted hunk of metal actually is:

The Antikythera clockwork is a computer. And a very sophisticated and exact one at that.

It was used to predict eclipses and other astronomical events. Because of its complexity and design sophistication, it probably wasn’t a one-off: The Antikythera clockwork was likely the culmination of at least a few decades’ worth of development by the ancient Greeks—which means that whoever made the Antikythera clockwork had the knowledge to make other, exceedingly useful devices, including clocks and calculators, with a myriad of practical applications.

Nevertheless, the technology that made the Antikythera clockwork possible was lost—it was only in the XIII century that mechanical clockworks were developed in Europe once again. Something to compare to the Antikythera clockwork in complexity, sophistication, compactness and accuracy did not come to be until roughly the XVI or XVII century, depending on your metrics—1,700 years after the ship carrying the Antikythera clockwork went down.

Why was the technology lost?

Actually, that’s the wrong question: Vital bits of knowledge and technology have been getting lost all the time, ever since human beings figured out how to make their own food.


However, it’s with the Enlightenment starting in 1602 that, suddenly, we have had a geometric progression of technological development: Technology building on technology slowly at first, but then accelerating in a smooth, uninterrupted curve. Indeed, the very idea of “progress”, so reflexively familiar to us today, so never-ending in our imagination, didn’t even exist until the Enlightenment.

This notion of open-ended, never-ending progress has only been possible because there has not been significant loss of technology since the start of the Enlightenment.

People might object and say that technology was lost before the Enlightenment because there was war, disease and famine—but there’s been plenty of war, disease and famine since the start of the Enlightenment. Yet we’ve somehow managed to hang on to our progress.

The question is, Why? Why has there not been a substantial loss of technology and culture over the last 400 years? It’s happened in every other period of history, in every other culture in history—except in Europe, starting about 400 years ago, and spreading out of Europe to eventually encompass the world.


I’ve been bitching about corporations as of late—I’ve been bemoaning the current era of corporate anarchy and “street-gang corporatism” that seems to have enveloped our society. I’ve been openly wondering whether the United States is descending into a fascist police-state ruled by corporate interests.

But that doesn’t mean I think corporations are the root of all evil. Quite the contrary:

I posit that the invention of the corporation made the progress of our civilization—and the explosion of humanity’s numbers—possible. I would argue that without corporations, the Enlightenment would not have happened, and the civilization we currently enjoy would not have come into existence. I would further argue that, without the concept and practice of the corporation, today we would be living the bad bits of the Middle Ages.
Read the rest at Lira's blog, or over at ZeroHedge where it has been mirrored.

Right or wrong, this effort by Lira is sure to throw "left-libertarians" into a fit!

Skip Oliva Says NBA Free Agents Follow The Taxes

Channeling the Sacramento Bee's Bill Bradley, Skip Oliva wonders:
I wonder what would happen if a LeBron James-type player actually came out and said, “Yeah, I considered the Knicks, but the high income taxes convinced me to go elsewhere.” Would it have any impact on the political culture?

Media Critics Throw Tantrum, How Many Are Hypocrites?

CNN has fired a senior editor for Middle Eastern affairs after she expressed respect for an Iranian religious leader who passed away. From the NYT:
CNN on Wednesday removed its senior editor for Middle Eastern affairs, Octavia Nasr, from her job after she published a Twitter message saying that she respected the Shiite cleric the Grand Ayatollah Mohammed Hussein Fadlallah, who died on Sunday.

Ms. Nasr left her CNN office in Atlanta on Wednesday. Parisa Khosravi, the senior vice president for CNN International Newsgathering, said in an internal memorandum that she “had a conversation” with Ms. Nasr on Wednesday morning and that “we have decided that she will be leaving the company.”

Ms. Nasr, a 20-year veteran of CNN, wrote on Twitter after the cleric died on Sunday, “Sad to hear of the passing of Sayyed Mohammed Hussein Fadlallah … One of Hezbollah’s giants I respect a lot.”

Ayatollah Fadlallah routinely denounced Israel and the United States, and supported suicide bombings against Israeli civilians. Ayatollah Fadlallah’s writings and preachings inspired the Dawa Party of Iraq and a generation of militants, including the founders of Hezbollah, The New York Times reported on Sunday.

Some supporters of Israel seized on the Twitter posting almost immediately. A Web site called Honest Reporting that says it is “dedicated to defending Israel against prejudice in the media” asked, “Is Nasr a Hezbollah sympathizer? This is disturbing enough given that the group is designated a terrorist organization by the U.S. and is committed to the destruction of Israel.

“And which of Fadlallah’s individual views does Nasr admire?”
How many "objective" media personalities in the US are sympathizers of the governments of the United States of America or Israel? How many respect Barack Obama, and which individual views of Obama do they admire?

Why is it offensive to admire one terrorist/terrorist organization and not another?

Tuesday, July 6, 2010

Naked Capitalism's Yves Smith, Economic Know-Nothing

I stopped reading Yves Smith's blog, Naked Capitalism, about two weeks after I first heard about it a couple years ago. It quickly became obvious to me that it was Yet-Another-Confused-Capitalism-Bashing-Blog written by Yet-Another-Confused-Clueless-Blogger-Completely-In-Love-With-Her-Own-Misconceptions. Still, other people continue to find Naked Capitalism and the opinionating of Yves Smith to be worth following, making it one of the more popular financial and economic-related blogs on the web, along with Krugman-worshipping Bill McBride's ironically (for a socialist) named Calculated Risk blog.

Therefore, Smith's latest op-ed in the NYT, co-written with Rob Parentau, is a worthy object of shame and ridicule in the hopes that a few more current readers might be transformed into former readers, like me. While it will lead to me quoting and critiquing nearly the entire article, I'm going to just pick out the most offensive (to economic logic) parts and peel the layers of ignorance away one by one, starting with this:
Reductions in deficits have implications for the private sector. Higher taxes draw cash from households and businesses, while lower government expenditures withhold money from the economy.
Hard to know if this is a case of sloppy editing or what but lower government expenditures do not "withhold money from the economy." Aside from operations by the Federal Reserve system and the fractional reserve multiplier, the amount of money in the economy is otherwise constant and does not change based upon the federal government's budget.

Presumably Yves Smith, a dyed-in-the-wool Keynesian, is implying that money not being "pump-primed" through the spending spigots of the federal government would, instead, be hoarded by individual savers and businesses and therefore "withheld" from the economy but either way, it is not the amount of money in an economy that spurs growth and production but rather individual measurement of risk, reward, time preference and desire to produce new goods and services.
Over the past decade and a half, corporations have been saving more and investing less in their own businesses.


The reason for all this saving in the United States is that public companies have become obsessed with quarterly earnings.
When? This accusation-as-explanation is worthless without a time period. Only by knowing "when" it was that this obsession developed can we then seek out possible explanations for this sudden change in business temperament, possibly deriving from a change in rules, regulations or other laws governing corporate management, for example.

You'll notice that this line of reasoning is simply a form of Keynes's "animal spirits" theory with different makeup and a hat. Keynes, like Yves Smith, never provided any explanation for why it was that the animal spirits of investors and businessmen would suddenly and rapidly shift in one direction or another-- it was always mystical and unexplainable, completely detached from any social or legal context.

Also, you'll notice that Smith here attempts to extrapolate an argument for all market participants from a particular subset that are faced with a particular performance benchmark, the quarterly earnings report. Private businesses, which do not have to report quarterly earnings to any shareholders or anyone else and who are therefore essentially completely unconcerned with such fetters of the public company world, nonetheless have been saving and not expanding their businesses as well. This fact is ignored because if it were addressed, Yves Smith's argument would crumble upon its realization.
Some may argue that businesses aren’t investing in growth because the prospects for success are so poor, but American corporate profits are nearly all the way back to their peak, right before the global financial crisis took hold.
Again, this argument completely ignores the plight of private businesses. What's worse, it's self-defeating. Past and even current profitability is not an indication of the potential for future success-- something that should've been obvious to Yves Smith when she observed that corporate profits are almost back to the peak reached "right before the global financial crisis." What were record profits saying then about potential future profits? Answer: absolutely nothing.
Another problem for the economy is that, once the crisis began, families and individuals started tightening their belts, bolstering their bank accounts or trying to pay down borrowings (another form of saving).
Confused and wrong.

Increased savings is not "another problem for the economy" but rather the solution to one of the existing problems-- excessive debt. It's also a perfectly rational response to economic and political uncertainty (which represents higher risk) and anticipation of lower prices in the future. If you are an investor and you realize that your debt-ridden neighbors are scrambling to find dollars to service their debt, you're going to want to hold more of those dollars rather than deploying or spending them because you know they're an appreciating asset. If you are an individual who believes that the liquidation of the existing debt structure will result in some blow-out, clearance prices when the world is "on sale", you're going to want to reserve some dollars for that. And if you're just a little frightened about what to do with your money when you've already been beaten to death in your 401(k) once and you see the politicians are absolutely zany, you're going to want to hold on to a little bit of cash, especially if you're worried you might lose your job soon.

But if you're Yves Smith, then you feel really threatened by this type of individual planning and you're sitting behind your computer concocting elaborate schemes to coerce these individuals into spending every, last red cent.

Oh, and if paying down debt was "another form of saving" then I suppose you could load up a bank account by depositing paid-down-debt, or you could start a business by using all the paid-down-debt as capital to purchase new assets with.

No, wait, you can't do any of those things with paid-down-debt, because paid-down-debt isn't anything-- in fact, it's nothing. And nothing isn't savings.
If households and corporations are trying to save more of their income and spend less, then it is up to the other two sectors of the economy — the government and the import-export sector — to spend more and save less to keep the economy humming. In other words, there needs to be a large trade surplus, a large government deficit or some combination of the two. This isn’t a matter of economic theory; it’s based in simple accounting.
'Course it isn't a matter of economic theory-- Yves doesn't do economic theory because she doesn't know any besides the "economic theory" of totalitarian socialism.

You see, if it were all a matter of simple accounting, you wouldn't even need anybody to make or do anything... you could just add a credit to this side and a debit to the other and... voila! Everything balances. In fact, this is precisely how the Fed creates money, which is probably precisely why Economic Know-Nothings like Yves Smith are such big fans-- it's imbecilically simple.

But don't take my word for it, instead read our friend Bob Murphy on the subject of fallacious national accounting schemes.
That result might not sound bad for the United States, since lower wages and prices would make American goods more competitive abroad. But falling incomes make it even harder for people to make payments on outstanding loans. And if defaults and bankruptcies cascade through the financial system, credit becomes tighter still. Ultimately, there is a danger that deflation — falling wages and prices — will snowball into a depression.
One minute the servicing of debt is threatening deflation. The next minute, the not-servicing of debt is threatening deflation. Yves Smith's solution, of course, is to keep the Ponzi going a bit longer, for what else do you call a system that requires exponentially larger amounts of money being continually injected into it to keep it from collapsing in upon itself?
So instead of pursuing budget retrenchment, policymakers need to create incentives for corporations to reinvest their profits in business operations. One way to do this would be to impose an aggressive tax on retained earnings that are not reinvested within two years. Another approach would be a tax on the turnover of corporate financial investments that would raise the cost of speculating with profits, rather than putting them into the business.

At the same time, the federal government must continue to encourage investment in the economy — ideally by creating incentives for investments in national priorities, like new energy technologies.
Three terrible and misguided ideas in two paragraphs, quite a feat.

Let's start with this "aggressive tax" on retained earnings. First of all, completely unjust to just haphazardly tax people or business organizations of their earnings, for any reason. Second, it's totally arbitrary-- why two years, why not one year, three years, two lunar years, two hours, etc? And what constitutes an "aggressive" tax, 5%, 10%, 50%, 99%? Third, does anyone want to make the argument that savings hoarded by businesses is an economically less efficient use of resources than tax revenues wasted on government boondoggles? What is the government going to do with this new source of revenues, anyway, turn around and "stimulate" the very businesses it stole it from in the first place to "get them spending" again?!

Similar criticisms apply to the second idea-- what corporate financial investments should be targeted, and why? For how long? What's the penalty? How was any of this calculated? As it stands, both of these suggestions are straight out of the Peter Orszag School of Economics, where we throw things at the wall and see what sticks (*note, none of it ever does, sadly).

Finally, what is it with the energy fascism? Was this global financial crisis caused by another Arab oil embargo I didn't get the memo on? Where is the calculation on that gambit?
The entrepreneurial pursuit of profitable growth has been the vital engine of prosperity since the Industrial Revolution. Yet corporate executives are being rewarded for myopia and speculation, undermining the very operation of capitalism. We need tax and regulatory policies to counter this destructive development, along with wider recognition that government deficits, when they counteract corporate savings, are necessary and salutary.
The entrepreneurial pursuit of profit has been the vital engine of prosperity of all time, not just since the Industrial Revolution. You could glean as much from a history book if you opened one up -- I take Yves Smith's apparent ignorance of the merchant economies dating back to ancient Greek and Chinese times as evidence she has not -- but even without knowing much of history it should be obvious from "simple economic theory". The only reason anyone ever takes any action is the hope of gaining a psychic profit from their doing so. But even in terms of material or monetary profits the phenomenon, and thus the important incentive it creates for innovation and continual growth, the profit motive far pre-dates the Industrial Revolution and is obviously present in the economic activities of currently non-industrialized and industrializing societies.

Truly, the only person suffering from myopia in this situation is Yves Smith (and her co-writer). It takes a severe misunderstanding of economic theory as well as the nature and operation of capitalism, which is a time-sensitive process of savings and production dependent upon the independent planning of free individuals within a market economy, to suggest that taxes and regulation might be the solution to what ails us economically. Capitalism depends on free markets, that is the absence of taxes and regulation, for its successful operation, else market participants are apt to miscalculate and misallocate resources.

Such a pitfall is of course exactly what the heavily regulated, heavily taxed US and world economies have stumbled into, a trap whose dangers were exaggerated by the continual manipulations of the money supply by wanton and reckless central bankers. Yet Yves Smith makes her suggestions about what to do as if the market economy previously lived in a vacuum completely devoid of taxes and regulations in the first place.

Message to Yves Smith, Economic Know-Nothing: government deficits are not "necessary and salutary" because they're not a free lunch.