There were 3 posts yesterday. The first was “Pessimal Currency Area Theory:”
Sorry about the one-day interruption in service — I forgot to mention that it was a travel day, and as it turned out I was too tired on arrival to blog or actually do anything.
And with that, back to Cyprus.
Kevin O’Rourke asks a good question. He points out that the classic argument for the euro’s irreversibility, from Barry Eichengreen, was that any threat to leave the euro would set off “the mother of all financial crises”: a crisis of confidence that would collapse a country’s banks. I used to believe this, but eventually noticed that the logic would break down if a country had its banking crisis first, and was forced into an Argentine-style corralito.
And Cyprus is there: closed banks, capital controls. In an important sense it’s already off the euro; it has an inconvertible currency, the Cypriot euro, that just happens to be pegged to the other euro at a parity of 1. Why, exactly, should this parity be sacrosanct?
Wait, there’s more. The theory of optimum currency areas says, in brief, that countries face a tradeoff between convenience and adjustment. Having your own currency raises transaction costs and makes business more difficult; but giving up your own currency means that you have to adjust to overvaluation through deflation, which is much more costly than devaluation. At this point, however, Cyprus has made doing business very difficult via capital controls, while retaining its inability to deal with overvaluation via currency realignment. So it has created a pessimal currency area, offering the worst of both worlds.
And Cyprus is now very overvalued — not only have the big capital inflows of yore dried up, a major export industry — offshore banking — has just died.
OK, there are still some considerations: access to ECB lending, possibly anti-inflation credibility, and general relations with the European Union. But Cyprus is now almost surely facing the prospect, not of recession, but of deep depression. Is this worth it?
The next post was “Ego, Image and Sin:”
The excellent Kathleen Geier — give this woman a bigger job! — has a terrific piece on pundit sins in the runup to the Iraq war, which has applicability to lots of other issues too.
I say “sins”, not just “mistakes”, advisedly. People have a right to be wrong (although they don’t have a right to be taken seriously, or employed in the opinion-giving business, thereafter); they don’t have a right to be wrong, at the expense of other peoples’ lives or livelihoods, for petty, personal reasons. Yet that’s exactly what happened among the war-mongers. As Geier says,
The inability of these pundits to think straight may simply be a symptom of narcissism poisoning. For them, invasion and war were all about presenting their preferred face to the world — and to themselves.
If you’re in the pundit business, you have a moral obligation always to second-guess your own motives, to ask yourself “Am I saying this because I’ve really thought it through? Or am I just feeding my ego?” And let’s be clear: ego-feeding happens on the left as well as the right, on matters economic and social as well as on questions of war and piece.
Do I fall into the sin of self-centered opinionating? No doubt; I am very much a fallible human being. But I try not to, which includes admitting when I was wrong. Can you say the same of any of the pundits Geier mentions — including those who later changed their tune?
Oh, how I wish Bobo and The Moustache of Wisdom would read more Krugman… The last post of the day was “Don’t Mention the Flimflam.” He headed the post with a video that I don’t know how to embed, but I’ve supplied a link:
Ed Kilgore points us to a Politico piece on Paul Ryan’s apparently declining profile, and has fun mocking the writing. Indeed, the piece is written as if it were a teen magazine discussing Justin Bieber.
But that’s actually not what struck me most; instead, it was the way Jonathan Martin manages to write a whole, quite long post about Ryan’s rise and apparent fall without mentioning the corresponding rise and fall of his reputation as a serious policy wonk. Even if you yourself don’t care about policy, surely this has to be a large part of the story?
After all, Ryan’s appeal was based on a very special kind of act: he was playing the Serious, Honest Conservative who was totally faithful to right-wing ideology but at the same time could run numbers with the best of them, and draw praise from mainstream commentators for his Seriousness and Honesty. Because he was Serious and Honest, you know — everyone said so (or at least everyone except you-know-who, and when has he ever been right about anything?).
But none of it was true; Ryan’s budgets were flimflam through and through, consisting of huge tax cuts for the wealthy that outweighed even his savage cuts in aid to the needy, so that all the claims of fiscal responsibility rested on giant magic asterisks on both revenue and spending. And although it took a couple of years for this reality to break through the conventional wisdom, at this point pretty much all the people who praised Serious Honest Paul have now conceded, in effect if not in so many words, that he’s a phony after all. They’ll never admit that they were wrong — hardly anyone ever does — but SHP can no longer play his accustomed role of serving the base while basking in the approbation of the VSPs.
And given all that, what use is he? What does be bring to the party, or make that the Party?
Now, Martin puts it all in terms of salesmanship, in terms of not generating enough buzz, in terms of catching cooties from Mitt Romney. I won’t say that these are irrelevant, but I do think they’re relatively minor. Basically, Ryan had an act that played well with Beltway insiders for a little while, but eventually went first stale, then rancid. He was 2011’s man, and that was then.