Consulting by RPM || Free Advice Blog

KopBusters

Jason brings to my attention this documentary project. I think these guys are nuts–meaning, I can’t believe they are screwing with cops like this. What they do is set up a room designed to look like a marijuana growing operation, but they don’t actually do anything illegal. And then they install hidden cameras to catch the police when they (allegedly) come in without a warrant etc.

The main idea here is that they claim the police routinely get a bogus witness to say there is illegal stuff going on at the private residence, and then the judge signs a warrant. So for real drug dealers, obviously they can’t prove that the police just invented the “evidence” to get the warrant.

But if the cameras have been rolling the whole time, and the whole thing is a reverse sting, then it’s obvious the cops must have lied when they said they had an informant saying he’d bought drugs at the house.

Anyway, an interesting project, but like I said I don’t mess with cops. When I get pulled over, it is hands-on-the-steering-wheel, and “Yes officer.” And I don’t try to catch them breaking the law on tape.

More Subtleties in the Claim that "Free Markets" Caused the Crisis

Per Bylund passed along this video interview with Krugman. He blamed the present mess on 30 years of rigid free market ideology, and then clarified that the regulatory apparatus failed to keep up with the changing financial system. In case you’re curious, the reason he has to say it that way is that there was no smoking gun of “deregulation” that the critics can point to. The only possible candidate is the 1999 relaxation of Glass-Steagal. Obviously I can’t prove that this is untrue, but if you study what that change did, I find it highly implausible that it sparked a housing boom that didn’t really kick into full gear until a few years later, and also coaxed banks to make trillions in bad loans.

The other gem of the interview is Krugman saying this is the worst financial shock since 1931/1932, but that (paraphrasing) “hopefully our policy responses will be different this time, so we won’t get another Great Depression.”

I agree, Professor Krugman. In 1931 and 1932,* the policy response was to run an unprecedented peacetime budget deficit, to urge businesses not to lay off workers or cut wages, to engage in massive public works spending, and to bring the discount rate really low to help the financial sector.

Good thing we’re not making the mistakes of the past.

* I would have to double check the timelines, but my description might more accurately apply to 1930/1931. By 1932 the government and Fed started to realize that their Krugmanian medicine (not their term) wasn’t working and they started changing course, like jacking up taxes (to try to close the deficit) and raising the discount rate (to stem the outflow of gold). But clearly they tried Krugman’s policies for two full years after the stock market Crash and got the worst depression in history.

Did Deflation Cause the Great Depression?

Yet another sneak peek at my upcoming book. The standard mythology of the Depression holds that one of the main causes was (price) deflation: Falling prices make consumers reluctant to spend, but this just feeds on itself, blah blah blah.

So you probably think that the most severe deflation in U.S. history occurred in the early 1930s, right?

Nope, it actually occurred during the 1920-1921 depression. From June 1920 – June 1921, CPI fell 15.8%. In contrast, starting at November 1929 and going forward in 12 month increments, the greatest deflation was 10.4% from November 1930 – November 1931.

You know, the 1920-1921 depression, the one caused by laissez-faire reactionaries in the White House that you spent a week in history class discussing? Boy, I don’t know about you, but I got so sick of how much class time we wasted going over the causes of the 1920-1921 depression. They didn’t even have an SEC or Social Security back then. No wonder it was so awful!

Tyler Cowen, a Sensible Central Planner

I know, I know, I’m just beating up on the guy all the time because I have impossibly high standards for my libertarian economists. I suppose the following is actually a responsible plea to limit Big Government:

Here is my guest post on bank nationalization. I could have stressed further that bank nationalization works best in small countries with a small number of banks. The more banks a country has, the greater the danger that nationalizing a few of them will make the rest much harder to recapitalize, thereby leading to a kind of contagious need for nationalization.

Remind Me Not to Move to South Korea

Jeff Tucker passed along this story:

South Korean prosecutors indicted a blogger on Thursday who had warned of financial doom for the country with critics saying he was targeted because his gloomy forecasts upset the government battling an economic downturn.

The blogger, writing under the pseudonym Minerva, became a household name for his predictions of sharp falls in the won and the local stock market and the collapse of U.S. investment bank Lehman Brothers. Prosecutors said he hurt the local currency by posting incorrect information online.

“The suspect in this case was indicted on charges of false information on two occasions,” an official at the prosecutors’ office said by telephone.

As South Korean markets tumbled late last year amid the global downturn, the main financial regulator warned it would crack down on what it considered malicious rumors and some economic analysts say they have come under pressure from authorities not to voice negative views on the economy.

At this point, I think the governments of the world should stop playing softball, and just order everyone at gunpoint to go buy something. Boom, recession solved.

…unless of course, there is some actual reason for the recession, besides fidgety consumers.

Patriotism, the Last Refuge of an Unprofitable Banker

Here is the story to which Glenn Beck was alluding on his awesome (radio) show the other night:

Hours after the bank received a new government bailout to cover heavy losses at its Merrill Lynch subsidiary, [Bank of America CEO] Mr. Lewis came under fire Friday from investors wanting to know why the bank did not notify them of Merrill’s losses in December, when the bank told the government it would need additional support to ensure the merger would survive.

Merrill Lynch reported a devastating $15.3 billion loss in the fourth quarter, its last quarter before the merger closed. Those losses came atop Bank of America’s own $1.79 billion loss last quarter…The shares closed at $7.18, down 13.7 percent. In a conference call with analysts, Mr. Lewis found himself fending off a barrage of questions about what he knew of Merrill Lynch’s losses, and when he knew it.
…
Mr. Lewis told analysts that he was surprised to learn in December, three months after the bank snapped up Merrill Lynch in a shotgun deal, that the magnitude of losses at the brokerage was far greater than expected. He said he had considered walking away from the deal at that point, but was persuaded not to, partly by regulators who feared that a failure to seal the deal could set off a new round of panic in the markets.

The decision to stick with Merrill despite its problems, he said, was patriotic. “I do think we were doing the right thing for the country,” Mr. Lewis said.

But that may not be the right thing for the bank’s shareholders, who were already upset that Mr. Lewis appeared to have overpaid to achieve his dream of dominating the brokerage business.
…
In the months after the merger, however, financial markets deteriorated more brutally. The bank’s shareholders voted on the merger on Dec. 5. And while the full extent of Merrill’s fourth-quarter losses might not have been fully known then, had shareholders had an idea of the extent of the losses, they may have agitated for the deal price to be renegotiated.

Mr. Lewis said he had considered trying to renegotiate the price once he learned the extent of Merrill’s losses. But he feared that the length of time required for a new shareholder vote would put Merrill and the markets at risk. More important, he said, the government did not want to risk new turbulence in financial markets if the deal were to be delayed.

“In recognition of the position that Bank of America was in, both the Treasury and the Federal Reserve gave us assurance that we should close the deal and that we would receive protection,” Mr. Lewis said.

And now you know why I think the economy is in the toilet for years. If you think capital markets serve a purpose, then you will have to agree with me that we are screwed.

Liquidation vs. Stimulus: Lionel Robbins From 1934

Another sneak peek from my forthcoming book… Check out this awesome quote from Lionel Robbins’ The Great Depression:

Nobody wishes for bankruptcies. Nobody likes liquidation as such. If bankruptcy and liquidation can be avoided by sound financing nobody would be against such measures. All that is contended is that when the extent of mal-investment and over-indebtedness has passed a certain limit, measures which postpone liquidation only tend to make matters worse. No doubt in the first years of depression, to those who held short views of the disturbance, anything seemed preferable to a smash. But is it really clear, in the fourth year of depression, that a more astringent policy in 1930 would have been likely to cause more disturbance and dislocation than the dislocation and disturbance which have actually been caused by its postponement?—Lionel Robbins, 1934

Glenn Beck Is the Man

I know he dissed Ron Paul back when it mattered, but I don’t care: Glenn Beck is on fire. Unlike other “right wing” hosts who whine about liberal hypocrisy yadda yadda yadda, Beck every night keeps hammering home the fact that the government is taking over the financial sector. Tonight he gave two very specific examples of how Citigroup and Bank of America were pressured to make bad business decisions because they were dependent on the government. This isn’t, “Hey, Pelosi took a limo to the inaugural, sic Al Gore on her!” This is serious stuff.

I didn’t catch the guy’s full name (Beck kept calling him Steve), but there was a free market economist on tonight who was saying the stimulus plans were nonsense. Fine, fair enough. But then Beck pushed him on the inflation issue. Beck did an aww shucks “what do I have wrong here?” and said what I’ve been saying for months now–that when real output is falling and the Fed is printing money like crazy, you are going to get big time price inflation. (And yes, Beck went over the aspect of falling real output–not his term of course–and knew full well what he was saying.)

So anyway, the free market economist “Steve” wussed out. He said something like, there would be not inflation like the 70s, but maybe 6 – 7%. And then–bless his heart–Beck laughed in the guy’s face, though goodnaturedly. He said, “Steve, if you think we’re going to have 6 or 7% inflation, you’re fooling yourself.”

Woo hoo! Keep it real, Glenn!