Silver Lining on the Small Screen

He isn't going to get listened to...but it's nice to see Paul Krugman basically take command this morning on This Week and lay out exactly what's going on. When I saw the panel included Will, Norquist, and Stephanopolous, I expected a right-wing pile-on, but Krugman ran that table like a boss. He used to be a bit shy and intimidated by these things, but he kicked ass.

No wonder he got hate mail.

Krugman and the Rentiers

Sometimes, it's just better to quote.

The latest economic data have dashed any hope of a quick end to America’s job drought, which has already gone on so long that the average unemployed American has been out of work for almost 40 weeks. Yet there is no political will to do anything about the situation. Far from being ready to spend more on job creation, both parties agree that it’s time to slash spending — destroying jobs in the process — with the only difference being one of degree.

Nor is the Federal Reserve riding to the rescue. On Tuesday, Ben Bernanke, the Fed chairman, acknowledged the grimness of the economic picture but indicated that he will do nothing about it.

And debt relief for homeowners — which could have done a lot to promote overall economic recovery — has simply dropped off the agenda. The existing program for mortgage relief has been a bust, spending only a tiny fraction of the funds allocated, but there seems to be no interest in revamping and restarting the effort.

The situation is similar in Europe, but arguably even worse. In particular, the European Central Bank’s hard-money, anti-debt-relief rhetoric makes Mr. Bernanke sound like William Jennings Bryan.

What lies behind this trans-Atlantic policy paralysis? I’m increasingly convinced that it’s a response to interest-group pressure. Consciously or not, policy makers are catering almost exclusively to the interests of rentiers — those who derive lots of income from assets, who lent large sums of money in the past, often unwisely, but are now being protected from loss at everyone else’s expense.

Of course, that’s not the way what I call the Pain Caucus makes its case. Instead, the argument against helping the unemployed is framed in terms of economic risks: Do anything to create jobs and interest rates will soar, runaway inflation will break out, and so on. But these risks keep not materializing. Interest rates remain near historic lows, while inflation outside the price of oil — which is determined by world markets and events, not U.S. policy — remains low.

And against these hypothetical risks one must set the reality of an economy that remains deeply depressed, at great cost both to today’s workers and to our nation’s future. After all, how can we expect to prosper two decades from now when millions of young graduates are, in effect, being denied the chance to get started on their careers?

Ask for a coherent theory behind the abandonment of the unemployed and you won’t get an answer. Instead, members of the Pain Caucus seem to be making it up as they go along, inventing ever-changing rationales for their never-changing policy prescriptions.

While the ostensible reasons for inflicting pain keep changing, however, the policy prescriptions of the Pain Caucus all have one thing in common: They protect the interests of creditors, no matter the cost. Deficit spending could put the unemployed to work — but it might hurt the interests of existing bondholders. More aggressive action by the Fed could help boost us out of this slump — in fact, even Republican economists have argued that a bit of inflation might be exactly what the doctor ordered — but deflation, not inflation, serves the interests of creditors. And, of course, there’s fierce opposition to anything smacking of debt relief.

Who are these creditors I’m talking about? Not hard-working, thrifty small business owners and workers, although it serves the interests of the big players to pretend that it’s all about protecting little guys who play by the rules. The reality is that both small businesses and workers are hurt far more by the weak economy than they would be by, say, modest inflation that helps promote recovery.

No, the only real beneficiaries of Pain Caucus policies (aside from the Chinese government) are the rentiers: bankers and wealthy individuals with lots of bonds in their portfolios.

And that explains why creditor interests bulk so large in policy; not only is this the class that makes big campaign contributions, it’s the class that has personal access to policy makers — many of whom go to work for these people when they exit government through the revolving door. The process of influence doesn’t have to involve raw corruption (although that happens, too). All it requires is the tendency to assume that what’s good for the people you hang out with, the people who seem so impressive in meetings — hey, they’re rich, they’re smart, and they have great tailors — must be good for the economy as a whole.

But the reality is just the opposite: creditor-friendly policies are crippling the economy. This is a negative-sum game, in which the attempt to protect the rentiers from any losses is inflicting much larger losses on everyone else. And the only way to get a real recovery is to stop playing that game.

All I can add to this at the moment is to remind people that when Republicans and their lot talk about "job creators" and "spurring investment" and the like, they're really talking about policies that benefit these Rentiers. The problem, as Krugman exhaustively showed, is that these people DON'T necessarily create jobs. They can plow money into investments that create jobs, yes, but they can also plow it into arcane financial instruments, real estate bubbles, and (now) food and commodities. That doesn't benefit anybody except them; and to the extent that it hurts the economy, it doesn't even benefit them, not really.

The other stunning thing about this article is that it shows just how radicalized basically-moderate economists like Prof. Krugman have become. He's not the only example of a scientist driven to radicalism in the face of the state's capture by its most short-sighted and least competent members—climatologists are becoming more radical by the day as well—but it's rather shocking when you compare it to his old "dismal science" articles. He's all but admitting that the old lines about economic self interest are falling apart in the face of classism and cronyism.

That doesn't invalidate him. Far from it. A bit of radicalism is the only sane response in these mad times. It shows, instead, just how far his compatriots have fallen. If they're going along with these apocalyptically stupid and destructive policies, what does it say about them

Edit: He also points to the solution: if you want to get sorted out, follow Iceland's lead and default, instead of following Ireland's lead of austerity.

Casey Mulligan's Strawman and the Numbers/Words Divide

It's nice to know that being a big-time University of Chicago economist writing in the New York Times doesn't preclude you from acting like a marginal blogger and beating the holy hell out of a strawman.

So we see, today, in Casey Mulligan's piece in the Times' Economix column, where he takes cheap shots at what he calls "New Keynesianism". Trying to take down a school of thought in a few paragraphs was a dubious mission at best to begin with, but I immediately noticed that his only actual source on what New Keynesianism is was the electric goop between his ears.

Professor Paul Krugman, Keynesian extraordinaire, agrees:

I’ve been asked for reactions to Casey Mulligan’s piece about the failure of New Keynesian economics.The short answer is, he should try reading a bit of Keynesian economics — old or new, it doesn’t matter — before “explaining” what’s wrong with it. For the doctrine he’s attacking bears no resemblance to anything Keynesians are saying.

This is fairly typical of freshwater economists. They know that what the other side is saying is obviously stupid, so there’s no need to read it; they picked up enough about it talking to some guy in a bar, or whatever, to criticize it...

...he presents as “the New Keynesian position” something that is just what he imagines, on casual reflection (or, again, maybe after talking to some guy in a bar) to be the New Keynesian position.

OK, so from now on I’ll assert that the Chicago position on unemployment is that we can cure it by sacrificing goats. Hey, I heard that somewhere — no need to actually read anything they say, right?

So, yeah, strawman. Krugman goes into greater detail about why the Mulligan piece is wrong, but you could pretty much assume it was wrong going in, so no worries there.

What surprises me, though, is just how much this differs from other social sciences. Citing is sacrosanct there. You simply don't refer to an idea or a position or a theory without pointing to someone, somewhere, that defines exactly what that theory is. (Something beyond Mulligan's half-assed links to "Investopedia".) It just goes to show what Noah Smith was talking about when he decried his graduate instruction in economics as little more than getting force-fed DSGE modelling with little instruction in real-world economics and even less instruction in competing economic theories. If you think that the only thing that matters is plugging numbers into a model, why on earth would you care about silly things like citing sources? Numbers are objective! Their only source is Divine Providence!

It points to a deep, deep problem that we are starting to have as a civilization. We know numbers. We know how to manipulate numbers. We have fantastic devices of unimaginable power in manipulating numbers. Humans, though, aren't fantastic at manipulating numbers. We're good at it. Some of us are really good at it.

No, what humans are really good at is manipulating words. Even the least of us has a greater faculty with words than all but the best of us do with numbers. We know words. We're familiar with words. We're not just good at it, we're fantastic at it. Best on the planet, maybe even best in the universe. Go, us.

Since we're familiar with words, we know not to trust words. That's why we focus on things like citation. People lie and misrepresent and omit and use rhetoric and all the rest to manipulate words to their advantage. You've seen it. You may have even used it. That makes us skeptical about words. We demand sources, and citations, and literature reviews, and all that other lovely academic folderol. We know better.

So when we delve into the world of numbers, many of us—maybe even most of us—set aside that healthy skepticism. We presume that "numbers can't lie". We presume, in turn, that quantitative, formal modelling can't be a lie. It can be wrong, but even then, we presume that it's the numbers that will prove the model wrong. If the numbers fit, then it must be true, right?

It isn't true. A model is just an opinion. It's the quantitative equivalent of saying "Colonel Mustard, in the Library, with the Pipe" in a game of Clue. It might be true. It might not. Certain choices of numbers might show it to be true. Others might show it to be false. Others might mean nothing at all. It's a theory. Words, numbers, whatever, that's how theories work.

That means you can indeed lie or misinform or misdirect with numbers. Choosing one set of numbers and ignoring another set might "prove" the model you want. The process of turning qualitative factors into quantitative variables ("operationalization") might also "prove" the model you want. And, hell, if the numbers prove multiple sets of models—which happens—picking one model and ignoring the rest can also "prove" the model you want. All of these are lying with numbers. They can happen. They do happen. Constantly.

I don't think that Casey's lying with numbers. I do think that Casey doesn't really realize what he's doing. He (and many others) forget that the same sort of care that we take with theories in words also needs to be taken with theories in numbers. You have to teach and learn and cite these theories, so that you aren't vulnerable to those who attempt to lie with numbers, and you aren't susceptible to making mistakes with your number-theories that amount to unwitting lies.

Most importantly, you have to be very careful to present the theories as they are, instead of how you think they are. If you don't, you end up like Casey Mulligan: beating the holy hell out of a strawman made of numbers.

"Contractionary Policies, It Turns Out, Are Contractionary"

Ireland? Under Austerity, it ain't doing so well. Greece? Under Austerity, also not doing so well.

So, as is usually the case, Krugman called it. He knew that austerity wouldn't work. He predicted austerity wouldn't work. He was razzed for predicting that austerity wouldn't work. But lo and behold...austerity doesn't work.

Which means, as he pointed out, that Keynesian analysis DOES. It may not describe a world as elegant as you see in RBC models. For the world we actually live in, though, it's still the best choice.

Brooks: National Greatness For The Ultra-Wealthy

Let us leave aside the spectacle of David Brooks saying, without evidence or reason, that "Bond markets are with you until the second they are against you. When the psychology shifts and the fiscal crisis happens..." He's just repeating the babble of the right.

But if his column is to be believed, he's a big fan of the catfood commission's recommendations, pointing to them as a means by which America can regain its "national greatness". But Krugman aptly noted that said recommendations basically involve jacking the taxes of the middle class to pay for big tax breaks for the wealthiest 1%.

So is that what "national greatness" is to Brooks? He babbles on and on about America's "economic and social values", and even the possibility of "revived patriotism":

It will take a revived patriotism to get people to look beyond their short-term financial interest to see the long-term national threat. Do you really love your tax deduction more than America’s future greatness? Are you really unwilling to sacrifice your Social Security cost-of-living adjustment at a time when soldiers and Marines are sacrificing their lives for their country in Afghanistan?

David Brooks, who the FUCK is the "you" here? It's sure as hell not the tiny minority that captures much of the income, holds most of the wealth, and owns most of the Senators. They don't give a rat's ass about a Social Security cost-of-living adjustment. It'd be a rounding error on their portfolios. THEY would benefit handsomely from the catfood crew's advocacy of slashed upper-class income taxes and corporate taxes. Where is THEIR pain? Where is THEIR sacrifice?

Sure, Brooks can take weak shots at the "upper-middle class". But who the hell cares about them? They aren't the issue. The upper-upper-UPPER class walking away with an increasingly grotesque percentage of the wealth that America and its people produce: THAT is the issue. The class war that people like Brooks are waging against the middle class on their behalf: THAT is the issue. The long slide of America into the kind of inequality that you used to see only in "banana republics": THAT is the issue.

America's national greatness is not built on propping up the incomes of exploitative Wall Street traders and well-connected executive managers.

Edit: Looking around, I've run across some sad, pathetic libertarians who are whining about that "tax deduction" line. Give me a break. He advocated for the deficit commission's wholesale transfer of wealth upward. He's an apologist for the wealthy, just like yourselves. He's clearly on YOUR side. You're just too dumb to realize it.

Additional Deficit Commission Bit

I hadn't noticed until I checked out Krugman's post that they recommended reducing the top bracket from 35% to 23%, and the lowest bracket from 10% to 8%.

How ridiculous can one group of people be? Poor people are struggling and have seen little wage increase in the last few decades, while the wealthiest are walking away with every bit of the wealth generated by said decades' drastic increases in American productivity...

...and you're going to make it WORSE?

Welcome to the America of the right-wing populist, folks. He lionizes you while he and his paymasters walk away with everything you spend those long, hard hours producing. The more he gets, the worse it gets. You're lucky you're getting paid at all: by this time in 2020, you'll probably get nothing for your time and effort except a pathetic allowance of Wal-Mart company scrip.

Wall Street's Pathologies

While I'm KrugPostin', here's a KrugLink to a piece in the NY Observer about, well, just what kind of asshats are working on Wall Street these days.

"The first thing that needs to happen, I think, is to get these people out of their homes," a man wearing a bespoke blue-striped shirt, a Hermés tie patterned with elephants and Ferragamo loafers said recently. "Correct! I'll explain," the veteran member of a bank restructuring and advisory team said.

Amid evidence of sham documents and widespread paperwork gaffes, if not systemic fraud that increasingly looks like it may be terrifically deep, Bank of America recently halted all foreclosure proceedings around the country. That followed similar announcements from the home-loan giants JPMorgan Chase and GMAC.

But Wall Street does not sympathize. "You had people putting zero down to get massive houses they couldn't afford to be in," he said Monday morning, "but now they want to stay. And the government wants to let them stay, because they're voters." A few hours later, the Goldman Sachs arm Litton Loan Servicing said it had suspended certain foreclosure proceedings, too. "Talk about a financial scandal," a Wall Street Journal editorial this weekend joked. "A consumer borrows money to buy a house, doesn't make the mortgage payments and then loses the house in foreclosure—only to learn that the wrong guy at the bank signed the foreclosure paperwork. Can you imagine?"

"The problem is they don't deserve to be in that place. They probably deserve to be there less than they used to," the source continued, referring to incomes lower now than they'd been when the loans were made in the first place. "You do need to foreclose, and you need to go back to people living in houses that are consistent with their income levels."

At this point, I'd like to remind readers that there are reports all over the place about people getting foreclosed upon that paid in full and paid in cash. Including in the Observer. Moving on...

In order to understand Wall Street's shrug during this foreclosure crisis, which as many as 40 attorneys general are expected to announce an investigation into this week, the key is to appreciate just how deeply connected the gesture is to Wall Street's view of who's to blame for the financial crisis.

The feeling, the idea at the bottom of all the others, is that even if Wall Street aggravated the crisis by bundling and betting on mortgage-backed securities that turned out not to live up to high ratings, it was not a matter of, as Citi chairman Richard D. Parsons told The Observer this summer, "bad people trying to do bad things." The loans wouldn't have been there in the first place if American home buyers, driven by what The Weekly Standard calls immediate gratification without personal responsibility, hadn't overstepped their bounds.

So when Ken Bentsen, the executive vice president for public policy and advocacy at Wall Street's largest trade group, the Securities Industry and Financial Markets Association, talks about this foreclosure fraud crisis, he points out that the homeowners arguing about administrative problems are the ones who've gotten themselves tied up in the foreclosure route in the first place, regrettably. "No one has raised the question that anyone who's going through this process shouldn't have been in the foreclosure process," said Mr. Bentsen, who, as a congressman from Texas, helped write the Sarbanes-Oxley and Gramm-Leach-Bliley acts.

"Look, I think it's just human nature. People want to have a bogeyman," Ralph Cioffi, the former Bear Stearns hedge fund manager, who was found not guilty of fraud, said in a recent Observer profile about anger at banks and bankers. "People don't want to take responsibility for their own actions."

Apparently not.

So, the Wall Street titans, having screwed up so badly that they needed to be rescued from their own financial crapulence by the American people, are right back to blaming absolutely everything on poor people. Let the borrowers suffer. I have a tee time to get to!

Never mind that the wealthy are more likely to play the "jingle-mail" card than the poor are. Never mind that the professionals involved all signed off on this nonsense. And never mind that everybody said that the crash couldn't happen, that home prices couldn't go down, and that anybody who said otherwise was a crank. And never mind that the institutions that these guys work for were more precariously leveraged than a thousand insolvent homeowners. No, it all comes back to the OTHER guy.

And why?

"Because people don't want to take responsibility for their own actions".

No, Government Hasn't Gone Up

Yeah, Krugman's been banging on this one for a while, but he linked to a great post by Menzie Chinn that shows the situation.

I've been lecturing on the government sector in my macro course. In updating my lecture notes, I plotted out some interesting graphs, which link up nicely with this previous post. The following four figures highlight: (1) normalized Federal outlays are not much higher than in 1986; (2) government consumption to GDP is back up to 1991 levels; (3) the cyclically adjusted budget deficit is only 2 ppts larger than that recorded in 1987; and (4) Federal consumption remains far below the previous peak in 2007.

One of the topics stressed in the textbook and lecture notes is the endogeneity of the budget balance, and especially the transfer and tax components. This leads to the first graph, of transfers normalized by nominal GDP, and transfers normalized by potential GDP...

...Notice that government transfers as a share of GDP looks particularly high because of the collapse of GDP in the Great Recession which started in 2007Q4. Normalizing by potential GDP highlights the fact that, while the ratio is the highest over the last forty three years, it is only slightly higher than that recorded in the mid-1980s, during the Reagan administration.

Normalizing government consumption and investment illustrates that overall spending by the government in purchases of goods and services is not particularly high. Even dividing by nominal GDP indicates that we are only (almost) back to the levels of 1990. Normalizing by potential GDP indicates that we are still only back to the levels of the early 1990's (this spending includes defense)...

...So, it is true that the Federal government's role in terms of spending and transfers has increased against the backdrop of a massive decline in output starting in 2008Q4 -- but some of the movements in various indicators are distorted by the large negative output gap that has opened up.

That latter bit is why I liked the post so much. Focusing on spending as a percentage of GDP is really prone to distortion. That measurement of spending as a percentage of potential GDP neatly removes that problem. It reinforces what I've known for a while: that you don't need to cut social spending. Just end the damned wars, end the Bush tax cuts, and end the recession. Do those things, and the budget falls neatly into place.

Wrong on the Bubble, Wrong on Stimulus

Oh, now this is beautiful. Simply beautiful. Economics of Contempt posted a list of all the prominent housing bubble deniers from around 2005 or so. An endless list of AEI and Cato and Wall Street Journal "limelights" all insisting that the economy is fine, that housing is fine, and that anybody who is complaining about it is just an idiot.

Nice, but that's not the fun part.

The fun part is when Krugman revealed that all of these guys are stimulus opponents too! In fact:

There turns out to be a quite strong correlation between denying the existence of a housing bubble a few years back — and jeering at those who said there was — and insisting, now, that fiscal stimulus doesn’t, can’t work.

The question is, why do such people command such attention? As I’ve pointed out before, the same people who denied the existence of a housing bubble also told investors that budget deficits would send interest rates soaring; in other words, anyone who believed these people in the past, and acted on that belief, has lost a lot of money.

It's the same sort of Very Serious Person that was wrong on Iraq, wrong on Afghanistan, and (going back farther) wrong on the Cold War and on Vietnam. It's hard to see what these guys are RIGHT about, actually; they're so reliably wrong that you could probably make a fortune betting against their predictions!

The problem...the significantly less funny part...is that by the time their allies in Congress are done, you're going to NEED a fortune. Because once they're done with Social Security and Medicare, it's the only way you'll spend your retirement doing anything but eating cat food and wondering whether that lump will go away on its own.

The Irish Illustration Of the "Unleashed BS" Theorem

Austerity is supposed to benefit the economy by clamping down on government and "unleashing market forces", right?

Well, Ireland is the proverbial poster child for austerity. It's carved up its budget expenditures. So, how are those unleashed forces looking?

“When our public finance situation blew wide open, the dominant consideration was ensuring that there was international investor confidence in Ireland so we could continue to borrow,” said Alan Barrett, chief economist at the Economic and Social Research Institute of Ireland. “A lot of the argument was, ‘Let’s get this over with quickly.’ ”

Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.

Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent.

Oh. That sounds horrible.

Well, uh, certainly the market has rewarded Ireland for its austerity, right? For unleashing market forces and clamping down on the dead hand of government and all that?

Despite its strenuous efforts, Ireland has been thrust into the same ignominious category as Portugal, Italy, Greece and Spain. It now pays a hefty three percentage points more than Germany on its benchmark bonds, in part because investors fear that the austerity program, by retarding growth and so far failing to reduce borrowing, will make it harder for Dublin to pay its bills rather than easier.

Oh. So there has been absolutely no benefit at all. The market was unleashed, and repaid Ireland by biting down and biting hard.
So how do they hope that they'll get out of this?

Now, the government is pinning nearly all its hopes on an export revival to lift the economy. Falling wage and energy costs, and a weaker euro, have improved competitiveness.

Well, hey, it worked for Canada in the 1990s, right? Sure, Canada had its own currency (which dropped like a stone) and used that to export to a surging American economy. Sure, it's literally impossible for everybody to export their way to prosperity, especially now that Americans are no longer the buyers of last resort. Sure, it doesn't seem to be paying any dividends now, and the market appears to be punishing austerity instead of rewarding it.
But if we just believe enough, the market will reward us! Right? Right?

That's why the "unleashed market" thing is BS. It's not economics. It's not even ideology. It's faith. It's Millenialism with math.  And while faith is a nice way to sort out your moral compass and think about your place in the universe, it's no damned way to run an economy.

Krugman sums it up:

The key thing to bear in mind about calls for harsh austerity in the face of a a depressed economy is that such calls depend on two propositions, not one. Not only do you have to believe that the invisible bond vigilantes are about to strike — that you must move to appease markets, even though right now bond buyers are willing to lend money to the United States at very low rates; you must also believe that short-term fiscal cutbacks will in fact appease the markets if they do, in fact, lose confidence.

That’s why the Irish debacle is so important. All that savage austerity was supposed to bring rewards; the conventional wisdom that this would happen is so strong that one often reads news reports claiming that it has, in fact, happened, that Ireland’s resolve has impressed and reassured the financial markets. But the reality is that nothing of the sort has taken place: virtuous, suffering Ireland is gaining nothing.

Of course, I know what will happen next: we’ll hear that the Irish just aren’t doing enough, and must do more. If we’ve been bleeding the patient, and he has nonetheless gotten sicker, well, we clearly need to bleed him some more.

Damned unbelievers.

Followup to the last Krug-Post

Okay, now this is just becoming comedy:

Matthew Yglesias makes a good point: The health care bill

represents a return, after fifteen years, of the idea that congress should be trying to pass major legislation that tackles major national problems. And even beyond that, it restores an even longer-lost tradition of congress trying to pass major legislation on specifically progressive priorities.

More than that, it represents a rejection of the view that the solution for all problems is to cut some taxes and remove some regulations. In that sense, what’s happening now, for all the disappointment it represents for progressives, is a historic moment.

No, it really doesn't. It's corporatist as all hell; Republicans love that, they just don't want to wear it. That's why they trapped the Dems, remember? I dislike quoting myself, but it seems appropriate here:

They knew, beyond a doubt, that Obama and the Senate Dems were aching for "bipartisanship" on this. Both have made a point of fetishizing it in the past, and both were likely to keep on doing it. They had to look hostile and recalcitrant in public, because they still always have to consider their base. But, in private, a few of them kept on playing at being just reasonable enough that it was conceivable that the Dems could get a few "R" names on the "yea" list.

It worked. The Dems thought they had a partner. Baucus sacrificed his credibility and became a laughingstock because of it. They hacked and hacked and hacked again at anything approaching tolerable policymaking in their legislation to bring some Republicans on board.

The Republicans didn't get on board. The Republicans were never going to get on board. They were just there to ensure that, sooner or later, the Dems would sacrifice so much that the legislation would be intolerable. It happened a few days ago, and we're seeing the fallout now.

No matter what happens, the Republicans win. If progressives—now so alienated from the party that they can barely stand it—support the bill, the Dems will all wear it. When it fails, when it creates this "financial and physical ruin", the Dems will be wiped out and the Republicans will gain control. Liberalism and progressivism will be discredited by their connection to this horror; the fact that this bill is antithetical to the ideals that animate liberalism will be completely washed away. The Republicans win.

Remember that the Finance bill that forms the backbone of this damned thing was practically written by Republicans. They're just too good at the game to have their party's fortunes ride on it.

As for "progressives causes" and all that...well, yes, that is lost, BUT IT'S LOST BECAUSE OF THE PEOPLE AND ATTITUDES MATT IS DEFENDING. Politicians—especially Democratic politicians,—go where the gettable votes and election resources are. If they can count on the base no matter what, they aren't going to do anything progressive, now, are they?
That's what's been happening, and that's what we've been saying!

The only difference is that we thought that Obama was different, and discovered that not only is he not different, but he might be the purest example of the breed in decades. Then he filled that big ol' kennel at 1600 Pennsylvania with every other prime example of the breed as well! (That the second-purest was undoubtedly Clinton just makes this that much worse. He just hid it better.)

If you want progressive legislation, then progressives need to be a concern. If progressives never break away from the party, even when faced with the one of the most horrifyingly corporatist, destructive, and impolitic health care bills that a Democrat could possibly author, then they'll never be a concern, so you'll never see progressive legislation. "Centrists" will always be the ones that may walk, so they'll be lovingly catered to.

Opposing this mess not only helps save the Dems from electoral apocalypse, but teaches them that they can't take their base for granted anymore. And people wonder why it's happening.

As for Matthew, I'll just bring up one quote:

I don’t want to endlessly rehash the intramural argument about whether this bill is worth passing or not, since at the end of the day I’m looking forward to working with all the netroots activists of the world on more and better legislation in the future.

The conciliatory language is cute, but it shows that he still doesn't get it.

If you pass this mess as-is, there won't be better legislation.

And if the bill's defenders keep on strawmanning and mischaracterizing the progressive opposition, and calling Dean every name in the book, why on earth do you think everything will be all nicey-nicey any time soon?

Edit: Yglesias himself links to a Greg Sargent piece entitled "Journalists Cheerfully Urinating On Senate Bill’s “Ideological” Critics", which links to offensive bullshit like this piece from Ron Brownstein about how Dean and LieberCare's critics (critics!) are "limosine liberals". Which is, from what I've seen, manages to be the most offensively wrong thing that has been said about all this. Quite an achievement.

Whether the Senate bill becomes law or not, this is not going away.

Needless to Say...

...I disagree with Krugman. It does happen, and it's happening here.

That said, some of the arguments here annoy me — in particular the line I’ve been hearing from some quarters that progressives who say we should hold our noses and pass the flawed Senate bill are just like the “liberal hawks” who supported the Iraq war.

No, they aren’t. And I don’t say that just because, as it happens, I stuck my neck way out in opposing Iraq, and was more or less the only columnist with a spot in a major newspaper to say outright that the Bush administration was misleading us into war.

Look, I don’t know for sure what motivated the liberal hawks; you’ll have to ask them. Some, I hope, were genuinely naive: despite all the signs that we were being sold a bill of goods, they just couldn’t believe that an American president would start a war on false pretenses. Others, I suspect, were being careerists, aligning themselves with where the power seemed to lie; sad to say, their career calculations were justified, since to this day you’re generally not considered “serious” on national security unless you were wrong about the war.

What’s going on with health care is very different. Those who grudgingly say “pass the thing” — a camp I have reluctantly joined — aren’t naive: by and large they’re wonks who have looked at the legislation quite carefully, understand both its virtues and its flaws, and have decided that it’s a lot better than nothing. And there isn’t much careerism involved: if you’re a progressive pundit or wonk, the risks of alienating the people to your left are at least a match for the risks of alienating people to your right.

I'm honestly surprised that Prof. Krugman mischaracterized things so badly. No, it is NOT as great a risk to alienate the left as alienate the right. To even pretend to believe that is either disingenuous or naive, neither of which I'd usually call Paul Krugman, so I'll just assume he's having a bad day or is annoyed or whatnot.

Alienating the right carries serious, serious consequences for a politician or staffer. That's what is meant when people say "Washington is wired for Republicanism": the major institutions and players in Washington are still by-and-large right-leaning instead of left-leaning. At best, they follow that kinda-sorta-liberal attitude of "bigger safety net for the poor, but no challenge to the practices of the wealthy" that motivates the Obama administration's attitude towards the financial sector. Usually, you don't even get that much.

And what about lobbying? Both politicians and their staffers, once outside of Washington, find their most profitable employment in convincing their successors that What's Good For [insert client here] Is Good For America. That is not generally a left-wing enterprise, and progressives don't see the same kind of paydays for doing it.

Meanwhile, taking potshots at their core supporters is something the Dems—ESPECIALLY Rahm Emanuel in his capacity as Obama's chief of staff—have developed into a hobby. Look at the reaction to Dean: instead of being respectful of the difference of opinion, they have been absolutely savaging him. And look at the treatment of House and Senate progressives: they've been turned into zombie-like reciters of talking points, because they can barely think for having been whipped so bloodily. In fact, that's one of the biggest reasons why all this is happening.

And, yes, this is also true for the non-politicos in Washington. Since so many of the institutions are conservative-leaning, and since belonging to the right groups and going to the rights events and having access to the right people are so important...

(...emphasis on the "right" there...)

...they aren't necessarily going to be that different. Sure, you want to take some potshots at the right, but if you go too far, you'll be labelled as "unreasonable" or "unserious" and will be ignored and/or shunned by the community. Torturing the "dirty fucking hippies" in the "nutroots" just isn't going to carry the same consequences, and Krugman should damned well know that. That's one of the biggest reasons this is happening.

The biggest problem, though, is that Krugman is misrepresenting this as a left vs. right issue to begin with. It isn't about left/right. It's about in/out. With Iraq, as with health care, you don't want to be identified with the "unserious outsiders". There's no money in that: there's no columnist gigs in the New York Times or Washington Post, no editor positions for the American Prospect or the New Atlantic, no cozy sinecures at corporate-funded think tanks. Careerism is absolutely connected to all of this.

I'd also like to return to this assertion above:

Those who grudgingly say “pass the thing” — a camp I have reluctantly joined — aren’t naive: by and large they’re wonks who have looked at the legislation quite carefully, understand both its virtues and its flaws, and have decided that it’s a lot better than nothing.

Does he honestly think that people didn't argue this during the Iraq war? THIS WAS THE EXACT SAME CLAIM MADE ABOUT IRAQ. Absolutely. 100%. They said "the Bush administration's plan is questionable and they aren't terribly competent, but getting rid of Saddam's possible weapons of mass destruction and creating a democracy in the region is worth it".

Throughout 2003-2004, this was the defense used by the supporters of the flagging conflict. Whenever a "DFH" pointed out that they were right, this defense was the one that they resorted to. "You go to war with the president you have, not the president you might want."

Prof. Krugman, I know you may not be as familiar with the "liberal hawks" as some (bizarrely...) but rest assured, there is no difference.

Except, perhaps, that since Democrats are wearing this, instead of Republicans, the spectacle of progressives' putative allies dropping trou and soiling the people who hold them up is just too much. I wish the Dems who are savaging Dean while fêting Nelson, Lieberman et al understood that. They are in for a nasty but well-earned shock.

Economists Acting LIke Blithering Idiots About Climate Change?

Is it Wednesday already?

Seriously, when economists wonder why the rest of us think they're clueless muttonheads with a dangerous entitlement complex, I think they can rest assured that we're talking about things like this:

“Rogue” is a good word for Levitt, but I think “contrarian” is more apt. Sadly, for Levitt’s readers and reputation, he decided to adopt the contrarian view of global warming, which takes him far outside of his expertise. As is common among smart people who know virtually nothing about climate science or solutions and get it so very wrong, he relies on other smart contrarians who know virtually nothing about climate science or solutions. In particular, he leans heavily on Nathan Myhrvold, the former CTO of Microsoft, who has a reputation for brilliance, which he and the Superfreaks utterly shred in this book:

“A lot of the things that people say would be good things probably aren’t,” Myrhvold says. As an example he points to solar power. “The problem with solar cells is that they’re black, because they are designed to absorb light from the sun. But only about 12% gets turned into electricity, and the rest is reradiated as heat — which contributed to global warming.”

Impressive — three and a half major howlers in one tiny paragraph (p 187). California Energy Commissioner Art Rosenfeld called this “patent nonsense,” when I read it to him. And Myhrvold is the guy, according to the Superfreaks, of which Bill Gates once said, “I don’t know anyone I would say is smarter than Nathan.” This should be the definitive proof that smarts in one area do not necessarily translate at all.

I trust you to realize why the quoted bit is absolute blithering idiocy. ClimateProgress goes into great detail if you're wondering, but I doubt you would be, since most people would just respond to this with a hearty "WTF?"

So what's gone wrong here? Well...

The reason I’m calling Levitt and Dubner Superfreaks for short is that Chapter Five of SuperFreakonomics, the “Global Cooling” chapter — aka “What do Al Gore and Mount Pinatubo have in common?” — has precious little economics, and what it does have is simply wrong. So the book could easily have been titled Superfreaks. [Note: Most of the book is searchable online. At the request of the publisher, I have taken down the PDF of the chapter.]

The answer is that Gore and Pinatubo’s eruption both suggest a way to cool the planet, albeit with methods whose cost-effectiveness are a universe apart.

Yes, the Superfreaks frame this chapter mostly as their (misguided) view of the science versus the views of that famous non-scientist Al Gore (as opposed to the views of all of the scientists who disagree with the crap they are peddling). That straw man approach gives them the “high” ground.

But by embracing aeresols and rejecting mitigation, they have adopted the identical view of that rogue, thoroughly debunked, non-economist Bjorn Lomborg. Unlike the Superfreaks, CP readers know that Ken Caldeira calls the vision of Lomborg’s Climate Consensus “a dystopic world out of a science fiction story.”

And yet Caldeira is the primary practicing climate scientist the Superfreaks rely on in the chapter! He has responded to many e-mail queries of mine over the weekend so I could characterize his views accurately. He simply doesn’t believe what the Superfreaks make it seem like he believes. He writes me:

If you talk all day, and somebody picks a half dozen quotes without providing context because they want to make a provocative and controversial chapter, there is not much you can do.

This is classic, classic economist behavior, where they move into another science and start babbling whatever crap comes to mind as long as it sounds good and fits their axiomatic dogma. A lot of people have already asked a lot of questions about Levitt's methodology. But as we see here, the methodology doesn't necessarily have anything to do with it, because the damned thing didn't have methodology worth the name to begin with!

It used to be that this sort of thing only happened in the social sciences and in historiography, where economists would barge in, brandishing whatever model happened to to be at hand, and proclaim that they have a solution that all the "little people" that came beforehand should just shut up and accept. Never mind that they removed all the evidence that didn't fit with all the surgical skill of a medieval barber. What was worst about this sort of dilletantism was that their statements were inevitably wrong, and did tremendous damage.

That's what we saw with Lomborg. Everybody who knows a damned thing about climate change knows that Bjorn Lomborg was completely off his rocker, and smacked him down multiple times: first when he tried to dismiss global warming, and then again when he tried to pull some sleight of hand by claiming that what he was really advocating was lovely things like malaria nets and childhood innoculation...as if it were climate change that were the problem there. But because he's an economist and therefore part of the "proper" tribe, he gets his sounding board whether he's right or not. Sure, there are other scientists who carry water for the polluters, but they're usually in fields that at least have something vaguely to do with ecology and meteorology. Lomborg is (when you get right down to it) a glorified sociologist! He has absolutely no business even discussing this field! But he does, because he gets the pass. So does Levitt.

And when these people misuse this power, as they inevitably do, it's the real scientists (and the rest of us) that inevitably have to clean up the messes. Except that with climate change, there may not be a "rest of us" to do it. But, hey, as long as it sells books, right?

The hat tip goes to Krugman. I'm a bit uncomfortable about his positioning on this one, though. I remember his old "dismal science" column, where he used to play this card with gusto. He's since recovered from his own bout of economists' entitlement. That's a good thing.

It's still important to remember that this is a serious, serious problem with social science that goes back years, not a "right wing vs. left wing" or "Krugman vs. Levitt" issue. (Privileging economists like that is the entire problem.)

It won't be solved by ideological wrangling. It'll be solved by economists rediscovering a bit of humility, and other scientists rediscovering their ability to tell that obnoxious economist to,

well,

"sit the hell down and shut the hell up".

Krugman Carving Up the "Freshwater" Economists

(Edit: Welcome to visitor's from Brad DeLong's site. I'm a big fan of his going way back, and he's one of the economists I do respect.)

For those who haven't read Paul Krugman's devastating article about the current state of economics, this may not mean much. But, fortunately, you have the delight of reading it to look forward to.

So don't let me detain you.

For the rest of you, here's his reaction to, well, the reaction:

I gather, though, that the usual suspects are utterly outraged at my suggestion that freshwater macro has spent several decades heading down the wrong path. They’re smart! They work hard, using hard math! How dare I say such a thing?

And all of this, of course, without a hint of irony.

For when freshwater macro took over a good part of the field, its leaders gleefully dismissed all the work Keynesian economists had done over the previous few decades, often with sneers and sniggers.

And that same adolescent quality was evident in the reactions to the Obama administration’s attempts to deal with the crisis — as Brad DeLong points out, people like Robert Lucas and John Cochrane (not to mention Richard Posner, who isn’t a macroeconomist but gets his take from his colleagues) didn’t say that when serious scholars like Christina Romer based policy recommendations on Keynesian economics, they were wrong; the freshwater crowd declared that anyone with Keynesian views was, by definition, either a fool or intellectually dishonest.

So the freshwater outrage over finding their own point of view criticized is, you might think, a classic case of people who can dish it out but can’t take it.

From what I know of your more Randroid economists, this isn't a big surprise. This sophomoric nonsense is the worst damned thing about modern economists, and what makes me automatically suspect the findings whenever its axioms and methodologies crop up in other fields.

But it’s actually even worse than that.

Oh?

When freshwater macro came in, there was an active purge of competing views: students were not exposed, at all, to any alternatives. People like Prescott boasted that Keynes was never mentioned in their graduate programs. And what has become clear in the recent debate — for example, in the assertion that Ricardian equivalence rules out any effect from government spending changes, which is just wrong — is that the freshwater side not only turned Keynes into an unperson, but systematically ignored the work being done in the New Keynesian vein. Nobody who had read, say, Obstfeld and Rogoff would have been as clueless about the logic of temporary fiscal expansion as these guys have been. Freshwater macro became totally insular.

And hence the most surprising thing in the debate over fiscal stimulus: the raw ignorance that has characterized so many of the freshwater comments. Above all, we’ve seen the phenomenon of well-known economists “rediscovering” Say’s Law and the Treasury view (the view that government cannot affect the overall level of demand), not because they’ve transcended the Keynesian refutation of these views, but because they were unaware that there had ever been such a debate.

It’s a sad story. And the even sadder thing is that it’s very unlikely that anything will change: freshwater macro will get even more insular, and its devotees will wonder why nobody in the real world of policy and action pays any attention to what they say.

"Raw ignorance." Rather harsh, but I can't see how to rebut it. Saying that you disagree is one thing. That's perfectly legitimate. Saying that you teach your students one viewpoint in preference to another? That's also legitimate. Spending more time on one school of thought instead of another? Kind of questionable, but still ubiquitous.

But not even teaching what Keynes was about? That's not even wrong. That's just ignorant. No, not "ignorant" as an epithet, it quite literally breeds ignorance. That's not being an educator. That's the game of indoctrinators. Cults do that.

I knew freshwaters was screwed up. But I have to admit, I wasn't expecting cultists.

Edit: Some of the commentators bring up John Cochrane's response, which includes rather a lot of "if markets are irrational, surely government regulators are even MORE irrational!" That strikes me as a clarion call to shut down the FDA. But never mind that. Take a look at this howler:

Paul, there was a financial crisis, a classic near-run on banks. The centerpiece of our crash was not the relatively free stock or real estate markets, it was the highly regulated commercial banks. A generation of economists has thought really hard about these kinds of events. Look up Diamond, Rajan, Gorton, Kashyap, Stein, and so on. They’ve thought about why there is so much short term debt, why banks run, how deposit insurance and credit guarantees help, and how they give incentives for excessive risk taking.

Yes. The problem of widespread speculation in almost totally unregulated markets like CDOs and credit default swaps—by investment banks like Lehman and Goldman Sachs—was the regulation on commercial banks.

Riiight.

What parts aren't "gub'mint is worse!" or "Paul just doesn't understand us beautiful flowers" are generally "you're trying to turn back the clock on 30 years of science!" As seen here:

Imagine this were a respected scientist turned popular writer, who says, most basically, that everything everyone has done in his field since the mid 1960s is a complete waste of time. Everything that fills its academic journals, is taught in its PhD programs, presented at its conferences, summarized in its graduate textbooks, and rewarded with the accolades a profession can bestow, including multiple Nobel prizes, is totally wrong. Instead, he calls for a return to the eternal verities of a rather convoluted book written in the 1930s, as taught to our author in his undergraduate introductory courses. If a scientist, he might be a global-warming skeptic, an AIDS-HIV disbeliever, a creationist, a stalwart that maybe continents don’t move after all.

This is one of the goofiest damned things I've ever read.

It's not even argument from authority. Leave aside the arrogance of assuming that one branch of thought could stand in for the entire field. These sorts of reversals happen all the time, and especially in social sciences. Would linguists get away with this sort of whining if they were trying to rebut Chomsky? Would behavioral psychologists be able to use this as a response to cognitivism? Would IR liberals be able to beat back realists (or vice versa) by saying that they're based on old books? Would the vaunted criminal "profilers" be able to use it to rebut the growing tide of people who question the efficacy of their methods?

No, of course not. Even the crustiest, most hidebound Marxian would laugh at the attempt. Only the most ignorant, closed sort of mind would even try.

But here we are, with Cochrane proving the point about Freshwater insularity and ignorance more eloquently than Krugman could have ever dreamed.

Krugman on Slaying Reaganism

Paul Krugman on the Public Option:

Let me add a sort of larger point: aside from the essentially circular political arguments — centrist Democrats insisting that the public option must be dropped to get the votes of centrist Democrats — the argument against the public option boils down to the fact that it’s bad because it is, horrors, a government program. And sooner or later Democrats have to take a stand against Reaganism — against the presumption that if the government does it, it’s bad.

Well put.

This is how far America has sunk. Where once people wondered whether or not capitalism was going to survive, we've now seen the resurgence of anti-government kneejerking, as if the government didn't have to rescue the market from itself less than a year ago. Were it just the Republicans, it wouldn't be so much of an issue. But now all are seeing just how deep the Ronnie Rot goes within the Democrats as well.

"The flattery that you're 'connected' can bring out the late Bob Novak in anyone"

That quote is from a very interesting, if dispiriting, piece from Harry Shearer on how the Obama White House isn't doing enough for New Orleans.

I say I might try one more time to reach out to Axelrod himself. "Don't bother with Rahm Emanuel or Axelrod," he advised. Why? "Their only interest in all of this is destroying Bobby" -- a reference to the state's fast-talking Republican governor and possible 2012 Presidential candidate Bobby Jindal.

"You mean, the same way that the Bush crowd only cared about destroying Kathleen Blanco?" I asked. His smile was part-rueful, part-"It's never too late to get wise, bud".

On Sunday, six days before the fourth anniversary of the catastrophe that almost drowned New Orleans, President Obama gave an "exclusive" interview to the New Orleans Times-Picayune. If you want to hear it for yourself, go here. Along the way, he dropped a little message: Janet Woodka's office would be allowed to expire at the end of next month.

Experiment officially over. To be clear, I'm not upset I wasn't treated like a celebrity or given ego-satisfying access. Frankly, the inside game creeps me out, the flattery that you're "connected" can bring out the late Bob Novak in anyone. I'm just angry that New Orleans, which did not bring about its own disaster, is watching a second consecutive president trash his glib promises to "rebuild it better".

Not exactly heartwarming stuff. But that bit about access says a lot.

See, Tom Ridge revealed a little while ago that the Department of Homeland Security had been manipulating its "terrorism level" system for political ends. That's caused a firestorm of controversy, because a lot of us had been shouting from the rooftops about how that was happening, and were either ignored or mocked for being "Bush haters". Vindication! Surely, now, the media would relent!

Not so much. No, here's how Marc Ambinder, proud avatar of the Washington consensus reacted:

Journalists, including myself, were very skeptical when anti-Bush liberals insisted that what Ridge now says is true, was true. We were wrong. Our skepticism about the activists' conclusions was warranted because these folks based their assumption on gut hatred for President Bush, and not on any evaluation of the raw intelligence.

This bought him a withering response from the people who had called it. All of them asked "why is it that journalists are so willing to make the ridiculous 'right for the wrong reasons' argument about their opponents and defend themselves as 'wrong for the right reasons'"? Even people who are reasonably progressive fall into this trap. Glenn says it's about access, and certainly that's a part of it.

But I think the quote from Shearer above has a role to play too. People are never quite sure whether they're right or wrong. You define "right" and "wrong" within a social environment. But journalists want to be listened to. They want to be 'connected'. They want to be, well, popular. Even if you're quite cognizant of all this, you can still be affected by it. If you're surrounded by people who manifestly know more about the issues than you do—the lot of any Washington journalist these days—then why not defer to them? They're "connected". You're "connected". You're part of their tribe. They're part of your tribe. That is what's important. Not "right" or "wrong"; that's just a matter of opinion.

(You don't even have to be a bad person. Shearer is a great man. He's fighting for a great cause. But even he is tempted to trade on his celebrity to gain inside access.)

So people like Krugman and Greenwald aren't being attacked because they were right, any more than they were being attacked for being wrong. Those things are irrelevant. They're being attacked because their arguments signify that they are Other. They aren't part of your little family. They aren't connected. Like the "gamma girls" that Media Whores Online wrote about so long ago, they don't even necessarily want to be. So they're fair game, and people like Ambinder will call them names in order to show just how loyal they are.

Even when they apologize, though, as Ambinder eventually did, the bits that aren't rescinded still show what's going on:

And yet -- we, too, weren't privy to the intelligence. Information asymmetry is always going to exist, and, living as we do in a Democratic system, most journalists are going to give the government the benefit of some doubt, even having learned lessons about giving the government that benefit.

This is just ridiculous. As Paul Krugman pointed out, he had every reason to doubt the Bush administration's pronouncements. In fact, he had very little reason to defer to them. But defer he does, because he is surrounded by "experts" that he's evidently too ignorant to question, in a community he desperately, desperately wants to belong to.

When he apologizes for that, I'll pay attention.

Edit: You should observe the latest apology, and what follows it. He's not really sorry for his description of the left. He's sorry he got caught out on it, and about "using the wrong words", as if there were right ones to express that ridiculous train of thought.

But look at this:

Both Glenn Greenwald and Marcy Wheeler have written posts eviscerating me for contending that Bush-hatred, not anything else, drove skepticism among liberals about the terrorist threat warnings. They've both written good posts, really; lawyerly, passionate and persuasive, over the top, at times, but they've given me a lot to think about. (One post is better than the other, but I won't say which one.)

They haven't changed my mind, but they've certainly modified my conclusion. I didn't spend enough time thinking about what I wanted to say. Incidentally, if I am a symbol of everything that is wrong in journalism, then I suggest they are both giving me WAY too much credit.

The bolded bit is mine, and it raises a simple question. Why, in an apology of all things, does Ambinder think that he's in any position to determine what is a "good" post and what isn't? He's apologizing for being a terrible writer! Why would a terrible writers think he gets to play judge and jury on the works of good writers like Greenwald and Wheeler!

Because he thinks of them as Outsiders, thinks of himself as an Insider, and believes that it's the Insiders that get to judge. That's why his "apology" is utterly meaningless. He'll talk about the past failings of "journalists", seeking safety in numbers and in the passage of time. And he'll admit to saying what he thinks badly. But he's never, ever going to admit that he came to the wrong conclusion. That might threaten his status.

As for that following post... look at this snippet:

The White House seems to have a back-up strategy and is openly embracing budget reconciliation. What Jay Rosen calls the Church of the Savvy -- that is, us media elite types -- say that reconciliation isn't possible, likely, or feasible.

Oh, Ambinder wants so badly to be one of the "savvy elites". Look beyond the watery veneer of irony, and you actually see the desperation there. He wants it so bad he can practically taste it. He wants it so bad that we can taste it.

I don't buy that Ambinder's sorry for a damned thing. He won't change his thoughts, won't change his actions, and has already gone back to the standard fare of vaguely-hidden shots at Those Filthy Hippies who said his Washington buddies were full of it.

Fear not, O Republican Elites. Robert Novak may be gone, but clearly a bumper crop of Douchebags For Liberty are jostling to take his place.

Liquidity Crisis

Er, yeah, this is worrisome.

What’s been happening in financial markets over the past few days is something that truly scares monetary economists: liquidity has dried up. That is, markets in stuff that is normally traded all the time — in particular, financial instruments backed by home mortgages — have shut down because there are no buyers...

...yesterday’s announcement by BNP Paribas, a large French bank, that it was suspending the operations of three of its own funds was, if anything, the most ominous news yet. The suspension was necessary, the bank said, because of “the complete evaporation of liquidity in certain market segments” — that is, there are no buyers.

When liquidity dries up, as I said, it can produce a chain reaction of defaults. Financial institution A can’t sell its mortgage-backed securities, so it can’t raise enough cash to make the payment it owes to institution B, which then doesn’t have the cash to pay institution C — and those who do have cash sit on it, because they don’t trust anyone else to repay a loan, which makes things even worse.

And here’s the truly scary thing about liquidity crises: it’s very hard for policy makers to do anything about them.

The Fed normally responds to economic problems by cutting interest rates — and as of yesterday morning the futures markets put the probability of a rate cut by the Fed before the end of next month at almost 100 percent. It can also lend money to banks that are short of cash: yesterday the European Central Bank, the Fed’s trans-Atlantic counterpart, lent banks $130 billion, saying that it would provide unlimited cash if necessary, and the Fed pumped in $24 billion.

But when liquidity dries up, the normal tools of policy lose much of their effectiveness. Reducing the cost of money doesn’t do much for borrowers if nobody is willing to make loans. Ensuring that banks have plenty of cash doesn’t do much if the cash stays in the banks’ vaults.

There are other, more exotic things the Fed and, more important, the executive branch of the U.S. government could do to contain the crisis if the standard policies don’t work. But for a variety of reasons, not least the current administration’s record of incompetence, we’d really rather not go there.

I remember seeing Kramer on the Colbert Report a few days ago, and how worried and freaked out he was over the market. Krugman is a little more bearish compared to Kramer, so this is no big surprise that he's on this, but things really do appear to be going a bit topsy-turvy.

(Hat Tip Sideshow.)