Krugman’s blog, 6/13 and 6/14/15

There were two posts on Saturday, and two yesterday.  The first post on Saturday was “Decline and Fall of the Davos Democrats:”

OK, I didn’t see that coming: even though I have come out as a lukewarm opponent of TPP, I assumed that it would happen anyway — the way trade deals (or in this case, dispute settlement and intellectual property deals that pretend to be about trade) always do. But no, or not so far.

A brief aside: I don’t think it’s right to call this a case of Washington “dysfunction”. Dysfunction is when we get outcomes nobody wants, or fail to do things everyone wants done, because there doesn’t seem to be any way to package the politics. In this case, however, people who oppose TPP voted down key enabling measures — that is, they got what they wanted. Calling this “dysfunction” presumes that this deal is a good idea — and that kind of presumption is precisely what got successfully challenged yesterday.

Or to put it another way, one way to see this is as the last stand of the Davos Democrats.

If you talk to administration officials — or at least if I talk to them (they may be telling me what they think I want to hear) — they offer a fairly sophisticated defense of this deal. It’s about geopolitics, they say — America has to be in the game here lest others (obviously including China) supplant our influence; meanwhile, they argue that the troubling aspects of the deal aren’t as troubling as they sound (they make a decent case on dispute settlement, less so on intellectual property). And they argue that the deal would actually improve labor protections in poor countries.

I’m not fully convinced, but this is a reasonable discussion.

But the overall selling of TPP, to some extent by the administration and much more so by its business allies, has been nothing like this. Instead, it has been all lectures from Those Who Know How the Global Economy Works — the kind of people who go to Davos and participate in earnest panels on the skills gap and the case for putting Alan Simpson in charge of everything — to the ignorant hippies who don’t. You know, ignorant hippies like Joseph Stiglitz and Elizabeth Warren.

This kind of thing worked in the 1990s, when Davos Man actually did seem to know how the world works. But now Davos Democrats are known as the people who told us to trust unregulated finance and fear invisible bond vigilantes. They just don’t have the credibility to pull off arguments from authority any more. And it doesn’t say much for their perspicacity that they apparently had no idea that the world has changed.

TPP’s Democratic supporters thought they could dictate to their party like it’s 1999. They can’t.

Saturday’s second post was “Regulation and Arbitrage (Implicitly Wonkish):”

According to the FT, the financial fear du jour is no longer Greece, or inflation, or any of the other things that have obsessed markets in recent years; it’s liquidity. We are pointed to a recent column byStephen Schwarzman, who warns that lack of liquidity is just like when Hitler invaded Poland (sorry, he said that about ending the tax loophole for equity managers) may cause a financial crisis; Nouriel Roubini agrees.

So what’s all this about? I’ve actually had a hard time understanding much of this discussion, and I don’t think it’s because I’m stupid; I’m pretty sure that the word “liquidity” is being used to refer to two somewhat different things. One is liquidity in the normal sense of “thick markets”, in which someone who wants to sell assets quickly can find buyers without offering fire-sale prices. The other is closer to arbitrage — the presence of investors who will buy assets that are obviously underpriced, and in so doing prevent big deviations of prices from fundamental values. These two things could be related, but aren’t the same — a market in which an individual investor can sell $10 billion in bonds without causing ripples might also be a market in which nobody will step in to buy bonds after a taper tantrum, and vice versa.

Schwarzman seems to be talking about the second of these two issues, what I was taught by Shleifer and Vishny to think of as the limits of arbitrage. As they pointed out almost 20 years ago, much investment is done by financial intermediaries who specialize in particular asset classes, and who tend to find themselves undercapitalized and unable to attract funds when the prices of those assets fall sharply — that is, precisely when they should be buying. This sort of thing probably plays an important role in financial crises, global contagion, etc.. And it would be interesting and important if there’s solid evidence that the problem is getting worse.

But most of the evidence being presented seems to be more about the first issue than the second — bigger intraday swings and so on, which in and of themselves matter only to a handful of players. And you really, really have to wonder about Schwarzman’s claims that financial regulation is actually worsening the problem; he write as if the only reason financial institutions pull back when asset prices are plunging is because government regulators force them to. Amazingly, he holds up bank behavior in 2008 — 2008! — as a model of the kind of stabilizing behavior we have lost:

More generally, banks will not satisfy customers’ needs in a financial crisis as they have in the past. While many banks actively lent in 2008, the new capital requirements will cause banks to hoard capital with an eye toward satisfying the regulators, rather than meeting the needs of their customers.

Just for the record, here’s what happened to prices of subprime-backed securities during the crisis — a pretty clear example of massive overshoot, achieved without a bit of help from Dodd-Frank:

Maybe there is a real issue here. But as always when you listen to financial insiders, especially when they use language nobody really understands, you have to assume until proven otherwise that they’re talking their book.

Yesterday’s first post was “Don’t Know Much About History, Jeb Bush Edition:”

The erstwhile front-runner tries to get things in order:

By hiring Mr. Diaz, Mr. Bush wanted to send a clear signal that “the culture of the Bush operation will now be a Pickett’s Charge engagement campaign with his main opponents,” according to one Bush ally.

Hmm. Pickett’s Charge is not exactly something you want to emulate …

I find myself thinking about an incident from a while back, where Jeb invoked the spirit of a “mystic warrior’:

After more than an hour of solemn ceremony naming Rep. Marco Rubio, R-West Miami, as the 2007-08 House speaker, Gov. Jeb Bush stepped to the podium in the House chamber last week and told a short story about “unleashing Chang,” his “mystical warrior” friend.

Here are Bush’s words, spoken before hundreds of lawmakers and politicians: ”Chang is a mystical warrior. Chang is somebody who believes in conservative principles, believes in entrepreneurial capitalism, believes in moral values that underpin a free society.
”I rely on Chang with great regularity in my public life. He has been by my side and sometimes I let him down. But Chang, this mystical warrior, has never let me down.”

How was he to know that “unleashing Chiang” was about landing Kuomintang troops on the mainland, where they would have been slaughtered? (Maybe that Pickett comparison isn’t so off after all.)

And Jebby is supposed to be “the smart one…”  Yesterday’s second post was “The Third Surprise:”

This has been a weekend for political surprises. First, of course, was the shocking rejection of TPP by House Democrats. Second was Hillary Clinton’s unexpectedly liberal/populist campaign-launching speech on Roosevelt Island.

What was the third? The pundit reaction to HRC’s speech, which so far, as I read it, has been mostly … positive.

Those of us who remember past campaigns have operated under the working assumption that Clinton Rules will apply in this campaign — that on any question of behavior or motivation Hillary will be assumed guilty, held to standards nobody else faces, accused of mendacity even when the facts clearly support her. It’s still a good guess that coverage will revert to type.

But first-round commentary on yesterday’s speech was remarkably OK, even appreciative of the policy substance.

It’s very strange. What’s going on?

Gee…  Maybe the Em Ess Em has looked around with horror and is terrified that a rider on the 2016 Clown Car might prevail.


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One Response to “Krugman’s blog, 6/13 and 6/14/15”

  1. Morgue Room Says:

    TPP: A maelstrom of ideas which belies the average user. The intent is to confuse and divert attention.

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