Not Brazil, but not bad

Carnival in Germany. My kind of people.

(HT to Larry).

Turn up the printing press

So says Scott Sumner:

Many economists simply assume that the current contraction has been caused by the financial crisis. After all, isn’t that obvious? Actually, no. For nearly a year after the onset of the financial crisis nominal GDP continued growing at better than a 3% clip. Now it is plunging. Most seem to assume that this new state of affairs was somehow caused by the Lehman failure, and the subsequent loss of confidence in the entire financial system.

My view is that this reverses the causality; it seems much more plausible that the current problems in the financial system are being caused by the recent (and expected future) sharp fall in nominal GDP. An unexpected decline in nominal
GDP puts stress on a banking system that is based on nominal debt. It is even more disruptive to a system that has become highly leveraged in expectation that the Great Moderation would continue, i.e., that central banks would insure that we never again saw a repeat of the plunging nominal GDP of the early 1930s. And it is devastating in a system that was both highly leveraged and already buffeted by severe losses in residential lending.

The 2007 subprime crisis did not cause the stock market crash of 2008, as stocks were still only modestly below record levels in early June 2008. The October crash occurred when investors began to see deflation and depression on the horizon, and saw that loan losses would spread from the already weakened subprime sector into the sort of commercial and industrial loans which would have been sound had nominal GDP continued expanding at close to 5%/year.

Read the whole thing. I tend to agree. But I'm trying to get his opinion on free banking as a long term solution to financial instability.

(HT to Tyler).

Why did they switch?

The bill did not pass on September 29 because, despite significant pressure from the financial sector, the real side of the economy had not suffered commensurately with the financial side. That is, neither unemployment nor foreclosures were “high enough” in a sufficient number of congressional districts. The regressions show that legislators who switched their vote between September 29 and October 3 likely caved in to the lobbying efforts of the American Bankers Association. Hence, in all probability the October 3 vote would have failed again had it not been for the pressure exerted by the ABA.

That's from Carlos Ramirez, of GMU and the FDIC. He also taught me macro.

Signs of hope

In Europe:

The European Union has turned into an undemocratic and elitist project comparable to the Communist dictatorships of eastern Europe that forbade alternative thinking, Czech President Vaclav Klaus told the European Parliament on Thursday.

Klaus, whose country now holds the rotating EU presidency, set out a scathing attack on the EU project and its institutions, provoking boos from many lawmakers, some of whom walked out, but applause from nationalists and other anti-EU legislators.

I saw Klaus speak about the environment, and I got to meet him. He makes me wish we had a rotating presidency. I'd love to see Governor Sanford of South Carolina as president, if only for a year.

Addendum: French students are not hopeful. 10-1 odds that the EU disintegrates.

One idea you won't hear from Congress

There are, to be sure, risks of political interference from government involvement in banking, but all of the current proposals for increasing lending require more government involvement. The challenge is to find one that increases lending and does the least harm.

If the government starts as a shareholder in new, healthy banks that eventually end up entirely in the hands of the private sector, the political risks start small and diminish. If instead the government combines open-ended and opaque financial support for troubled banks with promises of tight supervision and punishment for bad behavior, the risks are large and grow over time.

That's Paul Romer, not in Congress. He also (most likely) doesn't get paid by the big banks.

(HT to Tyler).

Stimulus is working, in DC

There is good news for workers who still have jobs. A WorldatWork survey of more than 1,000 U.S. companies found that 77 percent of the work force can expect to receive base pay raises this year.

And Washington is among the four metro areas with the largest projected salary budget increases of 3.1 percent. The other three are: Philadelphia, Pittsburgh and San Francisco.

The results in the "WorldatWork Special Update: 2008-09 Salary Budget Survey" were determined from interviews in early December, after credit markets tightened and after the presidential election in order to gather the latest outlook for compensation plans for 2009.

A survey conducted in April 2008 found salary budget increases of 3.9 percent in the Washington area (also the top of the range) along with Boston, Denver, Houston, Los Angeles, Philadelphia, San Diego and San Francisco.

That's from the Washington Business Journal. It is already the case that the 3 richest counties and 9 of the 20 richest counties are suburbs of DC. Let's hear it for targeted stimulus! Maybe the idea is a kind of trickle-down economics. We get rich in DC, then we buy stuff from the rest of you poor bastards. I just got back from Haiti, but that's a long way to go for poverty tourism. Soon I'll be able to do it in my own country! First up is Seattle.