Opposition to QE2 kicks it up a notch

November 16, 2010

A group of leading economist have joined together with Republican political strategists to take aim at the Federal Reserve’s latest money supply gusher (a.k.a. “QE2″) in an open letter to Fed Chairman Ben Bernake (the Wall Street Journal has both the open letter and the reaction).  Among the economists weighing in is Stanford’s John Taylor.

This, plus news that the economists have reached out to incoming House Budget Committee Chair Paul Ryan, ensures that monetary policy will remain a subject of serious political discussion for a while.  I repeat my assertion that this is a good thing, and reflects an electorate more knowledgeable than the political consulting industry is willing to admit.

Fed defenders, such as Rob McTeer, are already trying to smear the group: “What populists on the right and the left have in common is a distrust of the establishment, and to them the Fed personifies the establishment.”

So . . . John Taylor and Douglas Holtz-Eakin are now Ron Paul populists?

I don’t think so.  If those who defend loose money want to engage in a serious debate, we can have one; but placing the Fed on some ivory tower-like perch above the rest of us isn’t going to cut it anymore.

Cross-posted to BD


Same Old Jets, RIP

November 15, 2010

There are a few New Jersey natives in the Virginia blogosphere, but as far as I can tell, I am the only one who took his decidedly unhealthy concern for the New York Jets with him to this side of the Potomac River.

That said, those readers who are also part of the Jet fan base will probably recognize the feeling in their stomachs yesterday afternoon as the Cleveland Browns, fresh off their game-tying desperation drive, were moving down the field in overtime to get in position for the game-winning field goal.  Images of the 1986 Divisional Playoffs (for those old enough to remember it) may have flooded the mind, although strangely enough, this didn’t happen to me until the game was over.  What did imprint itself on my neurons was the most reliable phrase of disgust in Jet fandom.

I though to myself, “This is a Same Old Jets game.”

You need to be a Jets fan to understand this.  Just about every one of us can reach back in time to games where the team managed to pull defeat from the jaws of victory: the aforementioned 1986 playoffs; at least three games in the otherwise forgettable 1990 season; just about any game from 1987 through 1998 involving the Indianapolis Colts . . .

. . . and who can forget the Fake Spike Game (if you’re not a Jets fan, don’t ask)?

Even last year, as the Jets were taking the roller coaster to the AFC Championship game, there were three ugly last-minute losses (Miami, Jacksonville, and Atlanta – the last of which led Rex Ryan to famously and erroneously declare the team eliminated from the playoffs).

This year, by contrast, the Jets had only lost twice, and in neither game did they lead in the second half.

Yesterday, however, was all about preparing for the brutal letdown (made somewhat worse by the fact that the game was not on TV, forcing yours truly to follow it on my increasingly outdated cell phone) that only comes with being a Jets fan.

Then Antonio Cromartie recovered a fumble (thank you, again, San Diego!), and after some punts, Santonio Holmes scored a touchdown (thank you, Pittsburgh!), and the inevitable, poisonous loss became yet another victory-cum-desperate-message-to-cut-back-on-the-cholesterol.

Now, there are still seven games left in the season, plenty of time for this team to return us to normal (hearts pulverized into littel green and white pieces).  For now, though, this teams has won three games that any honest Jet fan would have considered lost (this one, Detroit last week, and Denver before the bye).

The Same Old Jets would be 4-5, and grmubling about maybe getting a wild-card.  These are the Same Old Jets.

The Rex Ryan Jets are 7-2 and forcing fans to look at their eating and exercise habits.

Cross-posted to VV


Boston beats Miami – again

November 12, 2010

We’re less than 10 games into the NBA season, and Paul Pierce is mocking LeBron James – after beating him twice.

The Heat are now two games worse than they were at this time last year (5-4, compared to 7-2 last year) and are on pace to win fewer than the 47 games they won last year.  Whiffs of panic are coming from South Beach.

I, for one, did not share the rage so many had (even outside Ohio) when LeBron chose to go to Miami.  For those who did, I’d recommend keeping the schadenfreude on ice.  After all: among the four losses Miami has taken, two were to Boston and one was to the last undefeated team in the league (New Orleans).  Last year’s schedule was much lighter at nine games in.

Meanwhile, as Brian Windhorst (ESPN) noted, the big problem Miami has had is on “plain, boring defense.”  Well, at present, Miami is 5th in the league in points against.  That tells me that what we’re seeing is the exception, not the rule.

Still, the big breakdowns have come against the best teams in the league.  The Heat weren’t built for a regular season run; they were built to win championships.  At some point, they have to beat the elite teams in the league.  At present, they’re 1-3 against them (they did beat Orlando).

So, in short, it’s too early to rule the Heat out, but it looks like Floridians dreaming of championship banners need to stop hitting the snooze button.

Meanwhile, Celtic fans can feel free to be their usually arrogant selves.  That team is cashing every ego-written check out there.

Cross-posted to VV


On QE2, the American people, and the benefits of “polarization”

November 9, 2010

Fed Chairman Ben Bernake has created a large and interesting group of opponents to his $600 billion-plus bond-buy/money-printing (a.k.a., a second round of “quantitative easing” or QE2 for short).  Sarah Palin whacked the plan, noting Germany’s concern in the process (NRO).  The Chinese Communist Party and yours truly both think Bernake is making a mistake, albeit for different reasons.  Still, those who have followed this blog may be surprised to see Zhongnanhai and the China e-Lobby founder on the same side.

That said, it’s Palin’s reaction that fascinates me here.  Among Republican politicians, Palin is perceived as the most populist and least-policy-oriented (and she tends to revel in the former perception).  For her to wade into the thickets on monetary policy is a big deal – and quite the surprise.  It does, however, reflect something about the American people that should give hope to all of us.

Before QE2 set off a firestorm, monetary policy debate was usually reserved to university faculty halls and quiet corridors in Washington.  To this day, almost no one who avoids being inflicted with my lectures in Macroeconomics at Germanna is aware of Alan Greenspan’s desperate attempts to spur the economy with loose money in the early 1990s.  His second big money flow, in the early aughts, only garnered attention after the bubble it caused burst in 2007-8.  Even Bernake’s QE1 was largely unnoticed by the American people or those they elected to govern (save Ron Paul).

Yet today, QE2 is rapidly evolving into the next major political debate – and that’s a very good thing.  Credit for this can go directly to the Tea-brewers (my term) and Paul for forcing the Fed into the spotlight and showing the American people how it can basically become a super-mint for the government.

That any mainstream discussion of the American economy can expand to include monetary policy is a sign of something my economics training drilled into me: that people over time gather more information and become more informed.  While we can all lament the sad decline of knowledge of American history, the fact remains that today’s average Americans are more aware of economics than their parents or grandparents were (or, dare I say, still are).  What was considered too complex for even politicians to understand just a generation ago is now common fare for argument across the country.  That’s a dramatic change, and one for the better.

There is one other factor in this that has been forgotten: the effect of “polarization” or “partisanship.”  These have become dirty words to many (especially centrists), who prefer everyone to get along.  In reality, though, bipolarization brings new issues to the floor, and new arguments.  Let’s face it, without the opposition instinct that has been drilled into most Republicans by the Obama Administration, QE2 may very well have been unnoticed (or worse, the reaction of Germany, the CCP, and Brazil may have triggered a nationalistic defense of QE2).  Instead, Republicans like Palin are seizing upon the longstanding but previously lesser-known arguments against easy money, and Palinistas (much like the Ron Paul backers) are giving themselves a crash course in monetary policy.

That sort of political self-education does not happen without “polarization.”

This is something we should keep in mind when we pine for the supposedly halcyon days of “consensus” politics and earlier generations: debates can be beneficial, inform the public, and yes, even wake up the political powers that be.  The reaction to QE2 is the best evidence of that.

Note: It works for the left, too. For years, opposition to Bush forced the Democrats to reach for any argument they could find to oppose the liberation of Iraq. They seized upon the increasing influence of the Iranian mullahcracy, and the argument was so persuasive (because it was right) that Bush himself changed course in 2007. Iraq and America are far better off because our politics didn’t quite stop at the water’s edge.

Cross-posted to VV


The Fed turns on the money spigot again, but will it work?

November 5, 2010

The Federal Reserve’s recent decision to throw at least $600 billion into the money supply (dubbed “QE2″ as in the 2nd round of “quantitative easing”) has caused a firestorm around the globe . . . and a debate among economists as to its wisdom.  At present, the debate centers on whether the late Milton Friedman, champion of Monetarism, would approve.  After examining the arguments, I would say Friedman would oppose it, and so do I.

Interestingly enough, it wasn’t John Taylor or Allan Meltzer (in the Wall Street Journal, albeit behind subscription wall) – both of whom are certain Friedman would have opposed QE2 – who convinced me, but rather (accidentally) David Beckworth, in his attempt to argue Friedman would favor it. 

One of Beckworth’s arguments is that Friedman would have reminded us about the entire Monetarist equation that he made famous, namely MV=PQ (for the uninitiated, V is the velocity of money; P is the price level; Q is the level of economic output; and M is, of course, the money supply).  Friedman always counseled for a steady rate of money supply growth on the assumption that stability would keep V and P relatively stable, while Q would grow.  Beckworth argues that V has not been stable lately, but has fallen during the Great Recession, and thus, Friedman would want that countered with actions such as QE2.

There’s only one problem: Beckworth doesn’t consider why money velocity (V) fell.  In fact, his own charts reveal that the decline in V could very well have been in response to the first round of “qualitative easing” (now known as QE1) in 2007-9.  In fact, V seems to have levelled off around the end of QE1.  This means either (1) given how Beckworth calculated money velocity, it was mathematically too dependent up money growth, meaning his model is flawed, or (2) the American people responded to QE1 not by spending, but by saving/reducing net borrowing, meaning QE2 will have the same effect.

Beckworth might not notice this, but Friedman certainly would have.  History has repeatedly shown us that the American people do not respond to temporary fiscal policies (I would submit that half the reason the growth in the “aughts” was so weak and uneven was that the tax cuts that partly fueled them had expiration dates).  The Great Recession and Japan’s “lost decade” are evidence that temporary monetary policies have the same impotence.

In other words, it is far more likely that the only effect of “QE2″ is lack of confidence in the dollar, greater concern over the the deficit being “monetized” (i.e., solved by printing money), foreign currencies depreciating in retaliation, and inflation – the very things Friedman opposed during his entire career.  This tells me he’d be with Messrs. Taylor and Meltzer (and yours truly) in opposing QE2.

Cross-posted to BD


What happened on Tuesday

November 4, 2010

While there are still a few races out there to be determined we have, for the most part, a good bead on what the voters did two days ago.

For starters, big-ticket Dem wins notwithstanding, this was a massive Republican landslide.  In fact, the best indicator of this is the Senate results – the one place where the GOP was disappointed.  Out of 37 Senate elections held on Tuesday, the Republicans won at least 24, and perhaps 25 if Dino Rossi pulls it out in Washington.  Either way, it’s a better result than any in recent memory – including the Reagan tide of 1980.

What made the GOP win look small was the Democrats’ lopsided majorities in the 2006 and 2008 classes.  Unlike the House, they were spared the voters’ wrath.  For the most part, though, Democrats who were on the ballot in 2010 – no matter what the office - were pasted.

That said, in some places the pain for the Democrats was excruciating, while in others, it just hurt.  To wit, the Republican wave weakened somewhat at the Missouri River.  This may be the first time the Missouri became a political boundary (the Mississippi, Ohio, and Potomac rivers are more familiar with this sort of thing), but the Senate and state legislative elections (see Jay Cost) show that the GOP underperformed in the southern Rockies and the Pacific Coast.  Now, there was some impressive Congressional gains for the GOP in that region, so it wasn’t as if the Republicans were frozen out.  However, I do find it interesting that among the party’s Teabrewer nominees in particular, only one east of the Mountain Time Zone lost (O’Donnell in Delaware).  Calfornia has been bleeding economic escapees for quite while; they may be doing to the southern Rockies what northeastern migrants have done to parts of the South – make them more receptive to Democrats.  It’s something to watch, in any event.

Meanwhile, two ballot measures jumped out at me: first, Washington state voted down a millionaire’s tax - perhaps even by a landslide.  Keep in mind, this is the deepest blue state west of Wisconsin no, wait, Illinois oops!  sorry, um  . . .  Maryland.  There we go.  Anyhow, Washington is one of the last places where one would expect tax-the-rich to go down in flames, but it did.

Secondly, in California, the two-thirds majority requirement to pass a budget was taken down by the voters.  Much of the talk about California was driven by the fact that a very small Republican caucus in the Assembly (lower house) could block a tax increase because it was larger than 1 in 3 members.  What was usually not mentioned was that the Democrats were usually able to peel off of a Republican or two anyway, but not before the GOP was given heavily inflated “responsibility” for trying to spare the taxpayer another whack.  Even with Governor Arnold parting from the scene, this was the fate of California politics without Prop 25 passing.  Now that 25 did pass, Jerry Brown can raise any tax he wants without trying to buy off any Republicans.  For the California taxpayer, it means little (as I said, usually some Republicans would cave) but it does mean that the GOP can stand on the sidelines and take the time and effort to construct alternative budgets and plans – things an opposition is supposed to do, but that the GOP couldn’t.  On the surface, it will appear that the End of the Arnie Era will liberate the GOP – and it will, but Prop 25 will have a hand in it, too.  Don’t be surprised if the Golden State Republicans recover handsomely in 2012 and 2014.

Cross-posted to BD


Meanwhile, in my neck of the woods . . .

November 3, 2010

. . . the local Republican incumbents did very, very well.

Our local GOP Chairman has the details.


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