Monday Reads

Good Morning!

I’m finishing up a paper today that’s off to be published on Real Estate Investment Trusts (REITS). Don’t worry!  I won’t bore you with the details but it’s basically about locating speculation bubbles like the one that happened in real estate markets in the 2000s.  There were a lot of folks that made money off of that ride although most of us little guys lost a lot.  The reason I’m bringing it up is that my first read of the day is a Paul Krugman response to Allan Greenspan’s critique of Obama’s economic policy.  I just wanted to remind you of what a mess the first part of the century has been and that many of the pots and the kettles still appear to be confused about their true nature.  I mean, the entire mess has given me a great research agenda, but at what cost?

Greenspan’s tut tuts Obama’s ability to create economic chaos in the academic journal International Finance (pdf here). While most of us are still trying to figure out what went so horribly wrong, Greenspan is trying to pin the blame on the new guys. I’m going to quote his abstract because it’s just more of the same old same old  from one of the beasts that brought us to this mess and its worth the bask in the arrogance to just remember his access to power.  Greenspan says it’s too much government regulation and Obma activism that’s hampering the recovery and that he can prove it with bad, outdated statistical methods.  This comes from the man that gave Wall Street a lot of cheap money and no regulation so they could go hog wild.  The recovery may be tepid, the stock market may be recovering, but I’ll be damned if there’s any regulation left standing upon which he can float his argument. Oh, Krugman dismisses the methods by which Greenspan infers that it’s government activism and its inherent chaos that’s created a stale recovery.  To be honest, a first year doctoral student would use better methodology and know the literature better.  That really scares me, frankly. What did he do while at the Fed?  Reread The Fountainhead?

So, here’s the bubblemeister’s blowing you know what up you know where with techniques that wouldn’t get me published in a mimeographed neighborhood newsletter let alone International Finance. Why hasn’t this man retired to an island somewhere?

The US recovery from the 2008 financial and economic crisis has been disappointingly tepid. What is most notable in sifting through the variables that might conceivably account for the lacklustre rebound in
GDP growth and the persistence of high unemployment is the unusually low level of corporate illiquid long-term fixed asset investment. As a share of corporate liquid cash flow, it is at its lowest level since 1940.

This contrasts starkly with the robust recovery in the markets for liquid corporate securities. What, then, accounts for this exceptionally elevated level of illiquidity aversion? I break down the broad potential sources, and analyse them with standard regression techniques. I infer that a minimum of half and  possibly as much as three-fourths of the effect can be explained by the shock of vastly greater uncertainties embedded in the competitive, regulatory and financial  environments faced by businesses since the collapse of Lehman Brothers, deriving from the surge in government activism. This explanation is buttressed by comparison with similar conundrums experienced during the 1930s. I conclude that the current government activism is hampering what should be a broadbased robust economic recovery, driven in significant part by the positive wealth effect of a buoyant U.S. and global stock market.

So, here’s Paul Krugman with ‘Rantings of an Ex-Maestro’.

He’s no longer the Man Who Knows; he’s the man who presided over an economy careening to the worst economic crisis since the Great Depression — and who saw no evil, heard no evil, refused to do anything about subprime, insisted that derivatives made the financial system more stable, denied not only that there was a national housing bubble but that such a bubble was even possible.

If he wants to redeem himself through hard and serious reflection about how he got it so wrong, fine — and I’d be interested in listening. If he thinks he can still lecture us from his pedestal of wisdom, he’s wasting our time.

Brad Delong actually does some analysis over at his blog Grasping Reality.

I don’t see how this hangs together in any coherent fashion at all.

If businesses are unwilling to invest in illiquid capital out of the fear that government action will impair the value of their investments, businesses must also fear that government action will impair the value of their existing illiquid investments. What is the value of their existing illiquid investments? The value of their existing illiquid investments is nothing more than the stock market value of their companies–liquid stock market value is, in the last analysis, nothing more than the cash flows proceeding from the illiquid investments that companies have made that generate the profits.

A much better and more sensible explanation for the relatively high value that the stock market places on existing illiquid corporate assets and the relatively low value that companies place on illiquid investments to expand their fixed capital is precisely that capacity utilization is low–so why spend more money now building factories when doing so would be more expensive and only add to your idle capacity?

And, indeed, if you ask people running businesses what is their single most important problem, they say that it is not (as they sometimes say it is) taxes; they say that it is not (as they said it was at the start of 2000) the cost and quality of labor; it is not (as they said it was in 2004) the availability and cost of insurance; it is not (as they briefly said it was at the start of 1993) government requirements. What do they say their biggest problem is? Poor sales.

Yup, it’s pretty basic.  You gotta have customers and those customers gotta have jobs and decent paychecks.  That’s the problem right now.

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