In a discussion with faithful reader RichardH, I was complaining about the legacy of Mlton Friedman as an example of the poor record of the Nobel Prize in Economics.

After I clearly stated my view, I decided to do a little research.  Isn’t that the way all intellectual discussions should unfold?

I first read the WikiPeida entry on Milton Friedman. The preceding link focuses on the criticism section, but I actually read more of the entry than just that.  In typical WikiPedia fashion it says on the one hand you have this opinion and on the other hand you have the opposite.

In following the references, I came across the Paul Krugman article Who Was Milton Friedman? in The New York Review of Books.  I think this was written in early 2007.

I believe that even Krugman’s piece gives too much credit to the value of the Friedman hypothesis as it applies to the period of stagflation in the 1970s and early 1980s.  In later sections, on other topics  Krugman warns that things are more complicated than Krugman’s brief analysis.  He should have given the same warning about his analysis of stagflation.

I think that the contribution of Krugman’s article is that it reminds us that economic theories that were developed to explain behavior under a certain set of conditions will fail badly when applied to situations that do not match the conditions specified in the theory.  For instance Kenyes proposed a theory of the failure of monetarism in periods of depression/exceedingly low interest rates.  The fact that these theories weren’t applicable during periods of high inflation and  high interest rates is not a problem of the theory.  It was a problem of applying the theory meant to explain one situation to a situation that it was never meant to explain.

Likewise, Friedman’s monetarist theories apply in a definable range of situations.  Unlike others who applied Keynes’ prescriptions to the wrong maladies, it was Friedman himself that applied his own prescriptions to the wrong maladies.

Do you give credit and award prizes to a stopped watch because it is correct two times a day?

I have just come across some of the information about how the U.S. Marine Corp is treating its prisoner Bradley Manning.

The buzzflash blog has the article Military Steps Up Retaliation Against Bradley Manning As Support Network Grows, which gives a hint at what is going on.

I wonder what harm they think Manning could do if they treated him humanely.  Maybe someone else can come up with a rationale as to why our government would act this way.  Does President Obama suddenly believe in torture now?  Is that why he wouldn’t look into the possible war crimes under the Bush administration?

Finally a TV series explaining Portland, Oregon.

Below is a trailer for the first episode of the show Portlandia.

There is a sneak preview of the entire first episode.

This episode was written up in Salon Magazine.

On Reuters web site you find the typical article about the Chinese leader’s visit, Deals, yuan in focus as China’s Hu visits U.S.

Currency concerns took center stage in Washington.

Senators Sherrod Brown, a Democrat, and Olympia Snowe, a Republican, sent a letter to Geithner promising to introduce legislation to “address China’s unlawful practice of currency manipulation.”

“China’s actions to subsidize its exports through currency manipulation pose both immediate and long-term challenges to American manufacturers and workers still recovering from the economic recession,” they wrote.

Their letter came after a group of senators said on Monday the United States had to pass legislation to punish China if it fails to allow its currency to rise in value.

The Congressional Steel Caucus of lawmakers from steel-making states urged Obama to tell Hu that “American patience for its unfair and illegal trade practices, and its exploitative and anti-competitive policies, has run out.”

I haven’t yet figured out exactly what illegal thing China has done by pegging their currency to the dollar or by only letting it rise by 3.5% over the last year.  If the Chinese let the value of the yuan rise precipitously against the dollar, large numbers of Chinese workers would be thrown out of work as their exports would drop as precipitously.  I can’t imagine why the Chinese government would think this would be a good thing for the Chinese government to do.

Moreover, the Chinese are very large holders of U.S. Government debt.  Why would the Chinese government want to devalue the debt owed to them?  They could offer to dump that debt on the open market before they revalued their currency.  I am not sure that the U.S. government would like that policy.

In fact, China is now suffering some level of inflation because of the growth of their economy.  If they could divert some of the goods being exported to satisfy the needs of their domestic economy and allow more foreign goods in to supplement the supply, they might be able to tamp down inflation. (Of course that doesn’t necessarily help the inflation in the one thing that cannot be imported, and that is real-estate.)

To the degree that  China makes the above suggested shift, they could afford to let the value of the yen rise at the same rate as the shift was being made without the huge sudden rise in unemployment.  However, The United States would be hard pressed to convince the Chinese that this revaluation of the yen ought to occur on a timetable that is best for the U.S.

Now all the U.S. has to do is to let the Chinese revalue our debt that they hold which is now denominated in dollars into debt denominated in the yuan, and China would probably be very receptive of our ideas.  Of course we would be fools to allow  such a change.

I don’t think it helps our cause to act all upset and threatening because they are looking after their own best interests.  We don’t pay much attention to them getting upset over our looking out for our own interests.  Perhaps it is time to drop the charade, be honest with the American people, and just negotiate on realistic terms.

I have just tried to do a modicum of research on the legality of the Chinese currency manipulation‘

In WikiPedia we have the article on Currency Intervention

Under normal rules^{[says who?]} of international trade, the Chinese central bank should sell its dollars on international currency markets and buy yuan in exchange, resulting in a self-correcting system: the U.S. dollar weakens and the Chinese yuan strengthens, until equilibrium is restored and the trade gap closes. However, in order to avoid this situation (which would decrease Chinese exports), the Chinese central bank “bends the rules”^{[says who?]}: they slow the appreciation of the Yuan, or in some cases effectively peg the CNY against the USD.

The super-scripted “says who?” refers to WikiPedia’s deprecation of using unsupported attributions.

I found an article, No legal basis for labelling China as currency manipulator, posted on the Chinal Daily web site.

“I find it very hard to be able to come to the conclusion that China is a currency manipulator,” said Robert Howse, an expert on international trade law and professor of international law at New York University.

With this attribution, you can decide whether or not you find the web site credible and/or whether or not you find  the New York University expert credible.

Paul Krugman has an article Can Europe Be Saved? in The New York Times Magazine.

In the article he discusses how the European Monitary Union (the common currency called the Euro) is presenting challenges to the European Union in these troubling economic times.  The article is a primer on the history of how the union got started and how it has progressed from a smooth success to the current bumps in the road.

He discusses the similarities and differences between the Euro’s relation to the countries of Europe and the Dollar’s relation to the states of The United States.

He discusses the possible ways various countries in Europe could handle their problems.  With each route, he describes who will be the winners and who will be the losers.

I recommend the article for the information provided.  This is not an endorsement of the predictions nor a guarantee that everybody sees the situation as Krugman describes it.  Whatever the outcome of the story may end up to be, you have to start somewhere in educating yourself about the reality.  You might as well start with someone who has a record of not being too ideological ( and is open about whatever ideological bias he has ) when it comes to issues related to his field of expertise, Economics.

Simon Johnson has posted the article The Bill Daley Problem on his BaselineScenario web site.

The Bill Daley Problem is completely bipartisan – it shows us the White House fails to understand that, at the heart of our economy, we have a huge time bomb.

Johnson goes on to describe the time bomb.

Today’s most dangerous government sponsored enterprises are the largest six bank holding companies: JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley.  They are undoubtedly too big to fail – if they were on the brink of failure, they would be rescued by the government, in the sense that their creditors would be protected 100 percent.  The market knows this and, as a result, these large institutions can borrow more cheaply than their smaller competitors.  This lets them stay big and – amazingly – get bigger.

I wonder if the danger could be ameliorated by explicit statements from the administration to the debt holders of these institutions that they will not be bailed out if the banks go bust.  The statement would explicitly emphasize the great risk these people are taking by investing in these banks.  Of course, we will never find out the answer to my wonder.  No administration, especially not this one, would ever put out such a clear warning.

There a lot of links in the Johnson article which I intend to follow up.

I had been meaning to post something about the appointment of Daley as Obama’s chief of staff as yet another indication that this administration had gone off the rails. Simon Johnson has done all the work and stated the case much more authoritatively than I ever could have done.

I have looked into just a few of the links in Johnson’s article.  The first few were over a year old, which is hardly a sign of peoples’ current thinking.

Then I checked out the link “Gene Fama, father of the efficient financial markets view, gets it better than anyone.” This again raises my doubts as to whether or not Simon Johnson and I are on the same wavelength or not.

Gene Fama is definitely infected with the Chicago School of Economics sickness.  As the father of the theory of efficient markets, he perverts the whole idea in order to defend capitalism.  His theory claims that the market sets prices based on all the current available information. If this were true, then perhaps his claim would be true  that capital could not be allocated any better than the way the free market allocates it.  He too readily dismisses the idea that bubbles are proof of the failure of efficient markets.  He says nobody could have known we had a bubble that was going to burst.  Amongst that crowd of nobodies he must dismiss all the people who were predicting that we were in a bubble and it would burst.  Some of those people included Nouriel Roubini who was complaining about derivatives as the bubble inflated.  Even Warren Buffet was claiming that financial derivatives were financial weapons of mass destruction.  All the people who were warning that the repeal of the Glass-Steagall act during the Clinton administration would lead to disaster turned out to be correct.  (I count myself among the people who were contemporaneously predicting the fallout from the repeal.)  Of course Fama is right that nobody could have predicted the exact date of the burst.

Fama claims that regulation is doomed to fail.  He agrees in a way with Simon Johnson that the idea of banks being too big to fail should be off the table. Instead of regulation we ought to raise capital requirements dramatically to as much as 40%.  I wonder who Fama thinks has the power to raise this requirement?  That wouldn’t be some form of regulator would it?  Couldn’t be.  He doesn’t believe in regulation.

I know, some of what I am saying is too simplistic an argument against Fama, but no more so than Fama’s use of efficient market theory to defend the Chicago School’s theory of how the world ought to work.  They don’t seem to recognize the difference of how something ought to work in a utopian world and the limits on how things can actually work in the real world made up of real people and not some ideal automaton.

If only real people would be completely rational.  If only politicians didn’t behave as politicians do.  If only big corporations didn’t use their resources to buy off politicians.  If only peoples’ lives could be adjusted instantaneously to each turn in the market.  If only people didn’t starve when they could not afford to buy food.

On November 1, 2010, Bloomberg News put together a debate on the resolution Big government is stifling the American spirit.

The debate participants were Arthur Laffer, Phil Gramm, Nouriel Roubini, and Laura Tyson.

I thought this debate might be a counter to Faux News’ so-called fair and balanced propaganda.

The Bloomberg version of fair and balanced is to pit Arthur Laffer, Phil Gramm, and Laura Tyson for the resolution against Nouriel Roubini who argued against the resolution. This description of a three against one debate sounds imbalanced, but that is not the half of it.  They pretend that LauraTyson is on the same side of the issue as Nouriel Roubini.  So they have two coordinated proponents of the resolution and they put a double agent on the other side as one of the people purportedly arguing against the resolution.

Nouriel Roubini gets to throw a few damaging punches and then the other three get to throw punches on the other side.  I can see that Roubini is a good debater and really gets to the heart of the matter, but after seeing 20 minutes of this 51 minute debate, I am wondering if he can win in this lopsided debate.  I’d vote for Nouriel Roubini for President if he can pull this off.  Unfortunately, Nouriel  Roubini is not eligible to run for President because he was born in Istanbul, Turkey to Iranian parents.

I finished watching the debate. It turned out to be pretty much a Phil Gramm against empty air debate. Surprise, surprise, he won. This despite the fact that he was the proximate cause of our recent financial disaster with his repeal of the Glass-Steagal act that he pushed through Congress while he was a Senator. He managed to spew more misinformation than anybody could have corrected had they been given equal time. Of course they were not given equal time.

To be fair, perhaps someone ought to have turned the debate into one about which big government policies stifle and which promote the American spirit.

Someone could have picked on the deregulation of the financial markets as a policy that stifles the American spirit. The unfair promotion of rewards for manipulating financial instruments relative to the rewards for invention, manufacturing real goods and services, and promoting the elevation of the skills of our work force is a real stifling of the American spirit. Some of our most talented, inventive, educated, and skilled people go into the profession of money manipulation instead of engineering, science, and manufacturing, because that is where people like Phil Gramm have shifted the balance of financial rewards.

Phil Gramm’s argument is akin to his watching a boxing match where one fighter uses every dirty and illegal practice in the book while the other boxer is trying to fight fairly and within the rules. It has been fixed that the referee will stand back and do nothing to enforce the rules. If he were true to his position in this debate, Phil Gramm would say that the referee is good for the sport of boxing because he is not stifling any boxer’s spirits.

Phil Gramm effectively fixed it so that the financial regulators would stand back and do nothing while the bankers and pseudo-bankers robbed the economy of its wealth. I suppose Gramm would take some of the loser’s share of the gate in the boxing match and give it to the dirty fighter so as to lift his spirits.

The audience in this debate just lapped it up. They couldn’t figure out for themselves what a charlatan Gramm is. They were not even upset at Arthur Laffer’s condescension to the audience when he claimed to simplify his argument so that it would not go over their heads.. And Bloomberg thinks this is an intelligent debate.

The article Volcker Sidelined as Obama Reshapes Economic Advisory Panel, is just one article in a long list that indicates to me that the Obama administration has gone completely off the rails.

Volcker, known for taming inflation in the 1980s, was disappointed with the way his advisory group became a public relations tool for the White House as its meetings with the president were televised live, making honest discussion difficult to conduct, the person familiar with his views said.

Volcker had rocky relations with Obama’s top economic staff from the start. Although the former Fed chief was in Obama’s circle of advisers early in the 2008 election campaign, he lost much of his influence when the newly elected president chose Lawrence Summers to head his National Economic Council.

The above two quotes may indicate that the derailment may be nothing new.  The frightening thing is that these moves separate Obama from any of the people who might have put the train back on the track.

Either someone has gotten to Obama so that he has taken complete leave or his senses, or as I feared, his time at the University of Chicago has corrupted his mind when it comes to economic policy.  Of course there really are other possibilities that I have not thought of to explain the loss of the Obama administration.

Bloomberg has two interesting interviews, December 16, 2010 Nouriel Roubini Interview on Economy and December 17, 2010 Taleb Interview on U.S. Economy, New Book.

In the Roubini interview, one of the key explanations by Nouriel Roubini is the following:

We need the fiscal austerity because otherwise there is a fiscal train wreck but unfortunately in the short run raising taxes and cutting spending makes the recession worse. It makes a vicious circle of deflation and recession. Same things for the structural reforms. You have to fire workers, you have to close down firms and move resources to the other sector in the short run that is deflationary. And if you don’t have growth you have two problems. One is social and political, the backlash against it – revolts, demonstrations, strikes, free governments falling.  And the other one is economic.  You have to stabilize debt and deficit in the private and public sector as a share of GDP, but if GDP keeps on falling stabilizing those things becomes mission impossible. So you have to restore economic growth, because without it the condition for doing these things is going to fail.

It would be easy for someone listening to the interview to take away the lessons of his long term prescriptions without remembering what is needed to get past the short run problems.  If you take only the second prescription without first taking the short run prescription, you are doomed to failure as he says in the above quote.

What you get out of Taleb requires more interpretation and filling in the gaps on the listeners part.  For that reason, there is less practical advice in the Taleb interview.  If you have the knowledge to fill in those gaps, you might get more out of Taleb than I have hinted at here.

To understand the significance of the title of Taleb’s new book, The Bed Of Procrustes: Philosophical and Practical Aphorisms, it helps to have the explanation of Procrustes from WikiPedia.

In the Greek myth, Procrustes was a son of Poseidon  with a stronghold on Mount Korydallos, on the sacred way between Athens and Eleusis. There, he had an iron bed in which he invited every passer-by to spend the night, and where he set to work on them with his smith’s hammer, to stretch them to fit. In later tellings, if the guest proved too tall, Procrustes would amputate the excess length; nobody ever fit the bed exactly because secretly Procrustes had two beds.  Procrustes continued his reign of terror until he was captured by Theseus, travelling to Athens along the sacred way, who “fitted” Procrustes to his own bed:

“He killed Damastes, surnamed Procrustes, by compelling him to make his own body fit his bed, as he had been wont to do with those of strangers. And he did this in imitation of Heracles. For that hero punished those who offered him violence in the manner in which they had plotted to serve him.”

Killing Procrustes was the last adventure of Theseus on his journey from Troezen to Athens.

If Roubini and Taleb spoke more slowly and put in all the words in their sentences, it might be easier for people to understand all the nuances of what they are saying.  To get the Roubini quote above, I replayed the segment of the interview many times to transcribe his words.  Few people will have the time or patience to do that.  More’s the pity. (Perhaps, as per Taleb’s book excerpts, Taleb would call me a nerd for trying to explain.)

I was going back to Bloomberg to find the interview with Mario Gabelli to post here in order to demonstrate my even handedness (fair and balanced) when I stumbled across this video. It may serve a purpose similar to the Gabelli interview.

November 12, 2010 (Bloomberg) Taleb Interview on Bernanke, QE.

The interview is introduced by Erik Schatzker on Bloomberg Television’s “Inside Track,”

The ink was barely dry on the FED statement last week announcing QE2 when a distressed email lit up my inbox “Something needs to be done about Bernanke” and it was from none other than Nassim Taleb.

I am having a devil of a time trying to reconcile what he is saying with my preconceived notions. He keeps going in and out of focus in my mind. I think what he says at the end of the interview does bring him back into focus without having to cut off his head to fit him into my Procrustean bed.