Shadow of the Hegemon

Apologies for the lack of updates. Been occupied (heh) of late.

Not quite sure if I buy that the latest upward tick in the jobs numbers is a good thing or not. Certainly it's a good thing for the newly employed. No-one would deny that. But any sort of improvement is going to be seen as a reason to lay off on low interest rate policies, to deny any further need of stimulus, and even to avoid changing anything at all about US economic policy.

That's not a good thing. America still has the same problems. It still has manufacturing jobs moving to other countries, especially China: not because of low wages, but because of the ease of access to suppliers and appropriate human capital. That's why Apple's there, that's why everybody else is there, and that is NOT something that Indiana is going to solve by nuking public-sector unions.  It requires a sophisticated understanding of the role of public investment. Those Chinese factories didn't spring up out of nowhere. Read the story: the Chinese government had a hand in it. As long as America is still led by people who think that government is the enemy of success, America won't have success.

America also still has the problem of financialization, and the fallout from that sector's dominance. Matt Taibbi's right that it's good that the foreclosure scandal hasn't been completely buried...but considering it was one of the biggest and more prevalent scams in U.S. history, the fact that it came as close as it DID is a problem.  Smart people are still moving out of the real world and into Wall Street chasing the big financial dollars, or simply trying to find a decent job as other sectors empty out. That's not right. That's not sustainable. And it's nothing to build an economy on.

But, mostly, America is STILL behind on one of the most important trends in the 21st century: renewable energy. Look at this story on India: the price of solar panels is absolutely crashing there. That story in the New Scientist quoted analysts as saying that solar could as cheap as grid energy across half of the globe by 2015. That's three years from now. This will absolutely revolutionize how the world looks at energy...and what is the United States doing? FRACKING! Jamming toxic chemicals into the earth to extract more hydrocarbons, possibly causing honest-to-goodness earthquakes, while the increasingly-inaccurately-named "developing world" says "heck with it" and just builds cheap solar panels! Panels that they may soon produce without any sort of American help whatsoever!

So, yes, this is good news. But it doesn't address the underlying problems.

One of the best parts about the "Occupy" movement? The fact that it baffles and enrages television and print pundits. Not all are as incoherent as, say, Canada's Andrew Coyne, who thinks that poor people should shut up because they have microwaves and color televisions(!), but it's pretty universal.

As Dalia Lithwick points out in Slate, that may be part of the point:

I feel it’s time to explain something: Occupy Wall Street may not have laid out all of its demands in a perfectly cogent one-sentence bumper sticker for you, Mr. Pundit, but it knows precisely what it doesn’t want. It doesn’t want you.
What the movement clearly doesn’t want is to have to explain itself through corporate television. To which I answer, Hallelujah. You can’t talk down to a movement that won’t talk back to you...

...Occupy Wall Street is not a movement without a message. It’s a movement that has wisely shunned the one-note, pre-chewed, simple-minded messaging required for cable television as it now exists. It’s a movement that feels no need to explain anything to the powers that be, although it is deftly changing the way we explain ourselves to one another.

Think, for just a moment, about the irony. We are the most media-saturated 24-hour-cable-soaked culture in the world, and yet around the country, on Facebook and at protests, people are holding up cardboard signs, the way protesters in ancient Sumeria might have done when demonstrating against a rise in the price of figs. And why is that? Because they very wisely don’t trust television cameras and microphones to get it right anymore. Because a media constructed around the illusion of false equivalencies, screaming pundits, and manufactured crises fails to capture who we are and what we value.

They don't necessarily trust the Internet, either, though they surely trust it more than they trust the cable networks. Is it really any wonder, though? Television news is basically rich people talking to rich people about rich people's problems. Someone like Andrew Coyne doesn't have the foggiest idea how the 99% live, or what their issues are. It's an academic, abstract issue to him, which is almost certainly why he fell back to "what are they complaining about? Color televisions, people! COLOR!" These people want simple solutions to the problem of poverty because isn't their problem. They just want it to go away and stop bothering them with the minimum amount of hassle. 

People might have been willing to go along with that when the Great and the Good were benefiting their lives. Those days are over. The 99% are now of the opinion that they've been scammed by the pundits and their cronies, and they're PISSED. That's the message. What they're planning on doing about it isn't quite certain yet. But that's the message.

Here's a chart from Talking Points Memo. It shows the American worker's share of national income.

The rebound in workers' income share after the early 2000s recession simply never materialized. As a result, this figure is now at by far its lowest level since the Bureau of Labor Statistics began keeping track of it in 1947.

There isn't much to add, is there? This is probably why Obama Admin people think that there's a recovery while regular joes think that America's going into a depression. For them, it has.

Sometimes, it's just better to quote.

The latest economic data have dashed any hope of a quick end to America’s job drought, which has already gone on so long that the average unemployed American has been out of work for almost 40 weeks. Yet there is no political will to do anything about the situation. Far from being ready to spend more on job creation, both parties agree that it’s time to slash spending — destroying jobs in the process — with the only difference being one of degree.

Nor is the Federal Reserve riding to the rescue. On Tuesday, Ben Bernanke, the Fed chairman, acknowledged the grimness of the economic picture but indicated that he will do nothing about it.

And debt relief for homeowners — which could have done a lot to promote overall economic recovery — has simply dropped off the agenda. The existing program for mortgage relief has been a bust, spending only a tiny fraction of the funds allocated, but there seems to be no interest in revamping and restarting the effort.

The situation is similar in Europe, but arguably even worse. In particular, the European Central Bank’s hard-money, anti-debt-relief rhetoric makes Mr. Bernanke sound like William Jennings Bryan.

What lies behind this trans-Atlantic policy paralysis? I’m increasingly convinced that it’s a response to interest-group pressure. Consciously or not, policy makers are catering almost exclusively to the interests of rentiers — those who derive lots of income from assets, who lent large sums of money in the past, often unwisely, but are now being protected from loss at everyone else’s expense.

Of course, that’s not the way what I call the Pain Caucus makes its case. Instead, the argument against helping the unemployed is framed in terms of economic risks: Do anything to create jobs and interest rates will soar, runaway inflation will break out, and so on. But these risks keep not materializing. Interest rates remain near historic lows, while inflation outside the price of oil — which is determined by world markets and events, not U.S. policy — remains low.

And against these hypothetical risks one must set the reality of an economy that remains deeply depressed, at great cost both to today’s workers and to our nation’s future. After all, how can we expect to prosper two decades from now when millions of young graduates are, in effect, being denied the chance to get started on their careers?

Ask for a coherent theory behind the abandonment of the unemployed and you won’t get an answer. Instead, members of the Pain Caucus seem to be making it up as they go along, inventing ever-changing rationales for their never-changing policy prescriptions.

While the ostensible reasons for inflicting pain keep changing, however, the policy prescriptions of the Pain Caucus all have one thing in common: They protect the interests of creditors, no matter the cost. Deficit spending could put the unemployed to work — but it might hurt the interests of existing bondholders. More aggressive action by the Fed could help boost us out of this slump — in fact, even Republican economists have argued that a bit of inflation might be exactly what the doctor ordered — but deflation, not inflation, serves the interests of creditors. And, of course, there’s fierce opposition to anything smacking of debt relief.

Who are these creditors I’m talking about? Not hard-working, thrifty small business owners and workers, although it serves the interests of the big players to pretend that it’s all about protecting little guys who play by the rules. The reality is that both small businesses and workers are hurt far more by the weak economy than they would be by, say, modest inflation that helps promote recovery.

No, the only real beneficiaries of Pain Caucus policies (aside from the Chinese government) are the rentiers: bankers and wealthy individuals with lots of bonds in their portfolios.

And that explains why creditor interests bulk so large in policy; not only is this the class that makes big campaign contributions, it’s the class that has personal access to policy makers — many of whom go to work for these people when they exit government through the revolving door. The process of influence doesn’t have to involve raw corruption (although that happens, too). All it requires is the tendency to assume that what’s good for the people you hang out with, the people who seem so impressive in meetings — hey, they’re rich, they’re smart, and they have great tailors — must be good for the economy as a whole.

But the reality is just the opposite: creditor-friendly policies are crippling the economy. This is a negative-sum game, in which the attempt to protect the rentiers from any losses is inflicting much larger losses on everyone else. And the only way to get a real recovery is to stop playing that game.

All I can add to this at the moment is to remind people that when Republicans and their lot talk about "job creators" and "spurring investment" and the like, they're really talking about policies that benefit these Rentiers. The problem, as Krugman exhaustively showed, is that these people DON'T necessarily create jobs. They can plow money into investments that create jobs, yes, but they can also plow it into arcane financial instruments, real estate bubbles, and (now) food and commodities. That doesn't benefit anybody except them; and to the extent that it hurts the economy, it doesn't even benefit them, not really.

The other stunning thing about this article is that it shows just how radicalized basically-moderate economists like Prof. Krugman have become. He's not the only example of a scientist driven to radicalism in the face of the state's capture by its most short-sighted and least competent members—climatologists are becoming more radical by the day as well—but it's rather shocking when you compare it to his old "dismal science" articles. He's all but admitting that the old lines about economic self interest are falling apart in the face of classism and cronyism.

That doesn't invalidate him. Far from it. A bit of radicalism is the only sane response in these mad times. It shows, instead, just how far his compatriots have fallen. If they're going along with these apocalyptically stupid and destructive policies, what does it say about them

Edit: He also points to the solution: if you want to get sorted out, follow Iceland's lead and default, instead of following Ireland's lead of austerity.

...just so that they can gut what remains of America's social safety net, and by extension its middle class.

And, as digby points out, along with Stan Collander,  the Dems appear to be perfectly willing to go along with it.

He says that just because the Republicans get their wish for a failure of a clean vote, it does not necessarily follow that they would vote for a "dirty" one either. He feels this vote is entirely a kabuki dance that's necessary (because of the polls saying people don't want to raise the debt ceiling) for the Republicans to record a "no" vote no matter what's in it.

So basically, the Democrats are sacrificing their position so that Republicans can be comfortable voting to raise the ceiling with spending cuts in a couple of months. If Collander is right, the Democrats are even stupider than usual. It's a twisted good cop/bad cop scene where the Republican base applauds its leaders for being tough guys and the Democratic base hand theirs a hankie and commiserates with their powerlessness. (And then the leadership goes out and has a cup of coffee and a donut, or in more common parlance -- Tipnronnie have a drink together.)

Digby has a point. That seems fits both bases quite nicely. The Republican base gets to celebrate a Republican victory, whereas the Democratic base gets to mourn one.

It's nice to know that being a big-time University of Chicago economist writing in the New York Times doesn't preclude you from acting like a marginal blogger and beating the holy hell out of a strawman.

So we see, today, in Casey Mulligan's piece in the Times' Economix column, where he takes cheap shots at what he calls "New Keynesianism". Trying to take down a school of thought in a few paragraphs was a dubious mission at best to begin with, but I immediately noticed that his only actual source on what New Keynesianism is was the electric goop between his ears.

Professor Paul Krugman, Keynesian extraordinaire, agrees:

I’ve been asked for reactions to Casey Mulligan’s piece about the failure of New Keynesian economics.The short answer is, he should try reading a bit of Keynesian economics — old or new, it doesn’t matter — before “explaining” what’s wrong with it. For the doctrine he’s attacking bears no resemblance to anything Keynesians are saying.

This is fairly typical of freshwater economists. They know that what the other side is saying is obviously stupid, so there’s no need to read it; they picked up enough about it talking to some guy in a bar, or whatever, to criticize it...

...he presents as “the New Keynesian position” something that is just what he imagines, on casual reflection (or, again, maybe after talking to some guy in a bar) to be the New Keynesian position.

OK, so from now on I’ll assert that the Chicago position on unemployment is that we can cure it by sacrificing goats. Hey, I heard that somewhere — no need to actually read anything they say, right?

So, yeah, strawman. Krugman goes into greater detail about why the Mulligan piece is wrong, but you could pretty much assume it was wrong going in, so no worries there.

What surprises me, though, is just how much this differs from other social sciences. Citing is sacrosanct there. You simply don't refer to an idea or a position or a theory without pointing to someone, somewhere, that defines exactly what that theory is. (Something beyond Mulligan's half-assed links to "Investopedia".) It just goes to show what Noah Smith was talking about when he decried his graduate instruction in economics as little more than getting force-fed DSGE modelling with little instruction in real-world economics and even less instruction in competing economic theories. If you think that the only thing that matters is plugging numbers into a model, why on earth would you care about silly things like citing sources? Numbers are objective! Their only source is Divine Providence!

It points to a deep, deep problem that we are starting to have as a civilization. We know numbers. We know how to manipulate numbers. We have fantastic devices of unimaginable power in manipulating numbers. Humans, though, aren't fantastic at manipulating numbers. We're good at it. Some of us are really good at it.

No, what humans are really good at is manipulating words. Even the least of us has a greater faculty with words than all but the best of us do with numbers. We know words. We're familiar with words. We're not just good at it, we're fantastic at it. Best on the planet, maybe even best in the universe. Go, us.

Since we're familiar with words, we know not to trust words. That's why we focus on things like citation. People lie and misrepresent and omit and use rhetoric and all the rest to manipulate words to their advantage. You've seen it. You may have even used it. That makes us skeptical about words. We demand sources, and citations, and literature reviews, and all that other lovely academic folderol. We know better.

So when we delve into the world of numbers, many of us—maybe even most of us—set aside that healthy skepticism. We presume that "numbers can't lie". We presume, in turn, that quantitative, formal modelling can't be a lie. It can be wrong, but even then, we presume that it's the numbers that will prove the model wrong. If the numbers fit, then it must be true, right?

It isn't true. A model is just an opinion. It's the quantitative equivalent of saying "Colonel Mustard, in the Library, with the Pipe" in a game of Clue. It might be true. It might not. Certain choices of numbers might show it to be true. Others might show it to be false. Others might mean nothing at all. It's a theory. Words, numbers, whatever, that's how theories work.

That means you can indeed lie or misinform or misdirect with numbers. Choosing one set of numbers and ignoring another set might "prove" the model you want. The process of turning qualitative factors into quantitative variables ("operationalization") might also "prove" the model you want. And, hell, if the numbers prove multiple sets of models—which happens—picking one model and ignoring the rest can also "prove" the model you want. All of these are lying with numbers. They can happen. They do happen. Constantly.

I don't think that Casey's lying with numbers. I do think that Casey doesn't really realize what he's doing. He (and many others) forget that the same sort of care that we take with theories in words also needs to be taken with theories in numbers. You have to teach and learn and cite these theories, so that you aren't vulnerable to those who attempt to lie with numbers, and you aren't susceptible to making mistakes with your number-theories that amount to unwitting lies.

Most importantly, you have to be very careful to present the theories as they are, instead of how you think they are. If you don't, you end up like Casey Mulligan: beating the holy hell out of a strawman made of numbers.

Ireland? Under Austerity, it ain't doing so well. Greece? Under Austerity, also not doing so well.

So, as is usually the case, Krugman called it. He knew that austerity wouldn't work. He predicted austerity wouldn't work. He was razzed for predicting that austerity wouldn't work. But lo and behold...austerity doesn't work.

Which means, as he pointed out, that Keynesian analysis DOES. It may not describe a world as elegant as you see in RBC models. For the world we actually live in, though, it's still the best choice.

Huh, I'm a bit behind the times. Didn't realize that Digby was doing real-name pieces now. But she is, at The Hill, and it's a great piece about how the talking heads in the media just ain't gonna sympathize with the American people, because they aren't really part of the American people to begin with. They make too much money for that, and (as digby puts it) "[i]t’s very easy to prescribe “shared sacrifice” when you will not personally sacrifice anything at all."

(Yes, it's under her real name. You want it, it's there. She was, is, and will always remain "digby" to me, so that's the name I'll use.)

I don't have as much time or ability to comment on The Blindspot, by Freddie deBoer, as I would like. I've already praised it; it doesn't need more, and I'll have to limit my comments to two short points.

First, the comments saying "Klein has beliefs! Yglesias has beliefs! They just focus on the policies that are possible!" are a bit wrongheaded.  Those things are undoubtedly true. Where the problem lies is that neoliberals like Klein and Yglesias only really pay attention to arguments coming from the center-left and the right. They don't link to anybody who's really to their left, they don't discuss anybody to their left, and therefore they don't acknowledge the existence of anybody to their left. This has been a constant problem online that has everything to do with the sheer multitude of voices. You can't read it all, and you can't even read most of it; so it becomes too easy to focus on a few quick, convenient sources.

That isn't even necessarily a problem. If those sources are doing a good job of being curators of opinion—which is the ultimate role of the vast majority of political bloggers—then they'll be exposed to a variety of opinions simply because of the nature of the network. The problem comes when all the big voices are all paying attention to the same voices, and rarely (if ever) venture outside of that reservation to see what everybody else is saying. This is not a recent phenomenon. In fact, it's the oldest problem with blogging, and has only been exacerbated by the rise of social networking tools as blogging substitutes. Echo chambers are a constant menace.

Secondly, you can't understand this issue without having also read The Rise of the New Global Elite. Money is speech. The Supreme Court ruled it so, it has reaffirmed it over and over again, and it's almost certainly going to keep doing so. In a country—and on a planet—hurtling headlong towards a plutonomy where the vast majority of wealth and income are in the hands of an ever-shrinking minority of the ultra-wealthy, that is naturally going to mean that speech is in the hands of that tiny minority as well.

deBoer hits on this when he talks about market fundamentalist libertarians and their outsized influence, but it isn't the thrust of the article and I think that misses the point. People who sell their ability to write and speak as their stock in trade—people like Klein and Yglesias, to get back to them—are almost inevitably going to have to sell that ability to the beneficiaries of the plutonomy because there's nobody else to sell it to. Speech is money, and we all know who has the money.

That sharply curtails their flexibility. Sure, they can advocate for progressive social policy and maybe even slightly progressive economic and taxation policy. But an out-and-out assault on the economic foundations of America? Hell no. Even acknowledging that such a thing is advocated could dry up the money spigots, and get you replaced by people whose morals, ethics, or lack of such more perfectly serve the interests of the guy who's ponying up the dough.  Sure, deBoers points out the outsized influence of outlets like Reason has to do with the money behind them, but he never brings up the fact that the money behind them is in the hands of self-interested, self-serving billionaires.

This isn't "libertarians" buying speech; this is the plutonomy perpetuating its interests by showering convenient people with money. And, yes, that is harmful to the American public discourse. But since the American members of that "global elite" demonstrated that they couldn't give a rat's ass about their fellow Americans at gunpoint, I doubt that matters much to them. Money is speech no matter where you're from.

deBoer did a follow-up entry that said he was being deliberately provocative. Fine. That's the OTHER, non-curatorial job of the blogger. But there's one thing that I did want to actually quote and response to.

I am sorry, though, for the Twitter ugliness. To put it succinctly, some conservatives were taking gratuitous swipes at the post on public Twitter feeds. I responded in an update to the post. Some people felt, for some odd reason, that this was out of bounds. But, look-- people were talking trash on public Twitter feeds. So I talked back. If you don't protect your tweets, they're public. Twitter is a public forum. It's not passing notes in biology class. I understand why people get bent out of shape about this, and it's why I fucking hate Twitter: it turns everybody cliquey. It's public, but gated through the following system, and it encourages a situation where people look to their in group to back them up in a kind of weird public/private fusion.

I wholeheartedly agree. Twittering is a form of blogging. It's public. You can dial up anybody's Twitter page and read the lot of it. The fact that's short-form blogging doesn't change that.  That's one of the reasons I get a bit annoyed with all that "death of blogging" nonsense. Blogging never went away. It's just that, for many, it got shorter and faster.
For many people, that's an improvement. But sometimes you need something beefier, and I still believe that Freddie deBoer's work demonstrates just how important it is.

Let us leave aside the spectacle of David Brooks saying, without evidence or reason, that "Bond markets are with you until the second they are against you. When the psychology shifts and the fiscal crisis happens..." He's just repeating the babble of the right.

But if his column is to be believed, he's a big fan of the catfood commission's recommendations, pointing to them as a means by which America can regain its "national greatness". But Krugman aptly noted that said recommendations basically involve jacking the taxes of the middle class to pay for big tax breaks for the wealthiest 1%.

So is that what "national greatness" is to Brooks? He babbles on and on about America's "economic and social values", and even the possibility of "revived patriotism":

It will take a revived patriotism to get people to look beyond their short-term financial interest to see the long-term national threat. Do you really love your tax deduction more than America’s future greatness? Are you really unwilling to sacrifice your Social Security cost-of-living adjustment at a time when soldiers and Marines are sacrificing their lives for their country in Afghanistan?

David Brooks, who the FUCK is the "you" here? It's sure as hell not the tiny minority that captures much of the income, holds most of the wealth, and owns most of the Senators. They don't give a rat's ass about a Social Security cost-of-living adjustment. It'd be a rounding error on their portfolios. THEY would benefit handsomely from the catfood crew's advocacy of slashed upper-class income taxes and corporate taxes. Where is THEIR pain? Where is THEIR sacrifice?

Sure, Brooks can take weak shots at the "upper-middle class". But who the hell cares about them? They aren't the issue. The upper-upper-UPPER class walking away with an increasingly grotesque percentage of the wealth that America and its people produce: THAT is the issue. The class war that people like Brooks are waging against the middle class on their behalf: THAT is the issue. The long slide of America into the kind of inequality that you used to see only in "banana republics": THAT is the issue.

America's national greatness is not built on propping up the incomes of exploitative Wall Street traders and well-connected executive managers.

Edit: Looking around, I've run across some sad, pathetic libertarians who are whining about that "tax deduction" line. Give me a break. He advocated for the deficit commission's wholesale transfer of wealth upward. He's an apologist for the wealthy, just like yourselves. He's clearly on YOUR side. You're just too dumb to realize it.

I hadn't noticed until I checked out Krugman's post that they recommended reducing the top bracket from 35% to 23%, and the lowest bracket from 10% to 8%.

How ridiculous can one group of people be? Poor people are struggling and have seen little wage increase in the last few decades, while the wealthiest are walking away with every bit of the wealth generated by said decades' drastic increases in American productivity...

...and you're going to make it WORSE?

Welcome to the America of the right-wing populist, folks. He lionizes you while he and his paymasters walk away with everything you spend those long, hard hours producing. The more he gets, the worse it gets. You're lucky you're getting paid at all: by this time in 2020, you'll probably get nothing for your time and effort except a pathetic allowance of Wal-Mart company scrip.

While I'm KrugPostin', here's a KrugLink to a piece in the NY Observer about, well, just what kind of asshats are working on Wall Street these days.

"The first thing that needs to happen, I think, is to get these people out of their homes," a man wearing a bespoke blue-striped shirt, a Hermés tie patterned with elephants and Ferragamo loafers said recently. "Correct! I'll explain," the veteran member of a bank restructuring and advisory team said.

Amid evidence of sham documents and widespread paperwork gaffes, if not systemic fraud that increasingly looks like it may be terrifically deep, Bank of America recently halted all foreclosure proceedings around the country. That followed similar announcements from the home-loan giants JPMorgan Chase and GMAC.

But Wall Street does not sympathize. "You had people putting zero down to get massive houses they couldn't afford to be in," he said Monday morning, "but now they want to stay. And the government wants to let them stay, because they're voters." A few hours later, the Goldman Sachs arm Litton Loan Servicing said it had suspended certain foreclosure proceedings, too. "Talk about a financial scandal," a Wall Street Journal editorial this weekend joked. "A consumer borrows money to buy a house, doesn't make the mortgage payments and then loses the house in foreclosure—only to learn that the wrong guy at the bank signed the foreclosure paperwork. Can you imagine?"

"The problem is they don't deserve to be in that place. They probably deserve to be there less than they used to," the source continued, referring to incomes lower now than they'd been when the loans were made in the first place. "You do need to foreclose, and you need to go back to people living in houses that are consistent with their income levels."

At this point, I'd like to remind readers that there are reports all over the place about people getting foreclosed upon that paid in full and paid in cash. Including in the Observer. Moving on...

In order to understand Wall Street's shrug during this foreclosure crisis, which as many as 40 attorneys general are expected to announce an investigation into this week, the key is to appreciate just how deeply connected the gesture is to Wall Street's view of who's to blame for the financial crisis.

The feeling, the idea at the bottom of all the others, is that even if Wall Street aggravated the crisis by bundling and betting on mortgage-backed securities that turned out not to live up to high ratings, it was not a matter of, as Citi chairman Richard D. Parsons told The Observer this summer, "bad people trying to do bad things." The loans wouldn't have been there in the first place if American home buyers, driven by what The Weekly Standard calls immediate gratification without personal responsibility, hadn't overstepped their bounds.

So when Ken Bentsen, the executive vice president for public policy and advocacy at Wall Street's largest trade group, the Securities Industry and Financial Markets Association, talks about this foreclosure fraud crisis, he points out that the homeowners arguing about administrative problems are the ones who've gotten themselves tied up in the foreclosure route in the first place, regrettably. "No one has raised the question that anyone who's going through this process shouldn't have been in the foreclosure process," said Mr. Bentsen, who, as a congressman from Texas, helped write the Sarbanes-Oxley and Gramm-Leach-Bliley acts.

"Look, I think it's just human nature. People want to have a bogeyman," Ralph Cioffi, the former Bear Stearns hedge fund manager, who was found not guilty of fraud, said in a recent Observer profile about anger at banks and bankers. "People don't want to take responsibility for their own actions."

Apparently not.

So, the Wall Street titans, having screwed up so badly that they needed to be rescued from their own financial crapulence by the American people, are right back to blaming absolutely everything on poor people. Let the borrowers suffer. I have a tee time to get to!

Never mind that the wealthy are more likely to play the "jingle-mail" card than the poor are. Never mind that the professionals involved all signed off on this nonsense. And never mind that everybody said that the crash couldn't happen, that home prices couldn't go down, and that anybody who said otherwise was a crank. And never mind that the institutions that these guys work for were more precariously leveraged than a thousand insolvent homeowners. No, it all comes back to the OTHER guy.

And why?

"Because people don't want to take responsibility for their own actions".

Yeah, Krugman's been banging on this one for a while, but he linked to a great post by Menzie Chinn that shows the situation.

I've been lecturing on the government sector in my macro course. In updating my lecture notes, I plotted out some interesting graphs, which link up nicely with this previous post. The following four figures highlight: (1) normalized Federal outlays are not much higher than in 1986; (2) government consumption to GDP is back up to 1991 levels; (3) the cyclically adjusted budget deficit is only 2 ppts larger than that recorded in 1987; and (4) Federal consumption remains far below the previous peak in 2007.

One of the topics stressed in the textbook and lecture notes is the endogeneity of the budget balance, and especially the transfer and tax components. This leads to the first graph, of transfers normalized by nominal GDP, and transfers normalized by potential GDP...

...Notice that government transfers as a share of GDP looks particularly high because of the collapse of GDP in the Great Recession which started in 2007Q4. Normalizing by potential GDP highlights the fact that, while the ratio is the highest over the last forty three years, it is only slightly higher than that recorded in the mid-1980s, during the Reagan administration.

Normalizing government consumption and investment illustrates that overall spending by the government in purchases of goods and services is not particularly high. Even dividing by nominal GDP indicates that we are only (almost) back to the levels of 1990. Normalizing by potential GDP indicates that we are still only back to the levels of the early 1990's (this spending includes defense)...

...So, it is true that the Federal government's role in terms of spending and transfers has increased against the backdrop of a massive decline in output starting in 2008Q4 -- but some of the movements in various indicators are distorted by the large negative output gap that has opened up.

That latter bit is why I liked the post so much. Focusing on spending as a percentage of GDP is really prone to distortion. That measurement of spending as a percentage of potential GDP neatly removes that problem. It reinforces what I've known for a while: that you don't need to cut social spending. Just end the damned wars, end the Bush tax cuts, and end the recession. Do those things, and the budget falls neatly into place.

Well, okay, not just DeLong. Also Atrios and, well, J. Bradford DeLong's commentator.

The president of the Minneapolis fed—you may remember him as the "interest rates cause inflation" guy—is now saying that the lack of employment demand is structural:

This estimate is based on a rather aggregative view of the labor market. It is important to dig deeper to get a better understanding of the problem, and there is a considerable amount of research under way exploring the quantitative importance of the various forms of mismatch. For example, the International Monetary Fund has recently released a special study based on a new state-by-state measure of the gap between demand and supply for workers with different levels of educational attainment. The study examines the impact of this variable and the foreclosure rate on state-level unemployment. It estimates that 1.5 percentage points of the national unemployment rate is due to these two sources and their interaction. Thus, according to this study, these two types of mismatch alone can account for a significant fraction of my estimate of 2.5 percentage points.

Good economic policy is about using the right tool for the problem at hand. The mismatch problems in the labor market do not strike me as readily amenable to the kinds of monetary policy tools currently available to the Fed.

A DeLong commentator named "Neal" provided the perfect response. What's the top four fields with job openings?

Top 50 job openings 2008-2018
1 Cashiers, except gaming
2 Retail salespersons
3 Waiters and waitresses
4 Customer service representatives

An "education gap"? For cashiers? Uh, no. Over-education, perhaps. Employers may be a bit unwilling to hire highly educated people for jobs that don't even require high school, since they'll (correctly) assume that they're gone the nanosecond they get a better opportunity. But Kocherlakota isn't saying that. He's saying that there are people who are under-qualified for the available positions, and that just ain't the case if you aren't talking about health care.  That's ludicrous.
Another brings up this salient point:

Mismatch is a cruel hoax. To quote Larry Summers before the bubble burst: "Nor can education be a complete answer at a time when skilled computer programmers in India are paid less than $2,000 a month."

Education doesn't help if cost of living differences overwhelm it.

And then there's Robert Waldmann, who decries Kocherlakota's confusion about structural unemployment:

The quoted passage from MinnFed is nonsense, because it is based on double counting. MinnFed first claimed that structural unemployment caused 2.5% of the difference between current unemployment and normal unemployment. MinnFed gave no theory of normal unemployment (up there it is assumed to be exactly zero and subtracting 5 % from the data is normal practice).

Everyone who has ever addressed the question, identifies the natural rate of unemployment with structural unemployment, so the number to hit is 7.5% not 2.5%. Note the quote "It estimates that 1.5 percentage points of the national unemployment rate is due to these two sources and their interaction." that is "It estimates that 1.5 percentage points of the 9.6% is due to these two sources and their interaction." 1.5/9.6 1 so if you count something twice you overestimate.

DeLong makes it clear that he thinks the guy should be canned. He may be right. This bizarre comment and the interest rate thing just show that he's completely out of touch. If not completely out to lunch. Saying that there's a skill gap when it's Cashiers that people want is just ridiculous, and Waldmann has now called his basic economic acumen into question. I don't know what they're doing over at the Minneapolis Fed—wanking over DSGE models, I'm led to believe—but it clearly isn't anything useful.

Oh, now this is beautiful. Simply beautiful. Economics of Contempt posted a list of all the prominent housing bubble deniers from around 2005 or so. An endless list of AEI and Cato and Wall Street Journal "limelights" all insisting that the economy is fine, that housing is fine, and that anybody who is complaining about it is just an idiot.

Nice, but that's not the fun part.

The fun part is when Krugman revealed that all of these guys are stimulus opponents too! In fact:

There turns out to be a quite strong correlation between denying the existence of a housing bubble a few years back — and jeering at those who said there was — and insisting, now, that fiscal stimulus doesn’t, can’t work.

The question is, why do such people command such attention? As I’ve pointed out before, the same people who denied the existence of a housing bubble also told investors that budget deficits would send interest rates soaring; in other words, anyone who believed these people in the past, and acted on that belief, has lost a lot of money.

It's the same sort of Very Serious Person that was wrong on Iraq, wrong on Afghanistan, and (going back farther) wrong on the Cold War and on Vietnam. It's hard to see what these guys are RIGHT about, actually; they're so reliably wrong that you could probably make a fortune betting against their predictions!

The problem...the significantly less funny part...is that by the time their allies in Congress are done, you're going to NEED a fortune. Because once they're done with Social Security and Medicare, it's the only way you'll spend your retirement doing anything but eating cat food and wondering whether that lump will go away on its own.

Austerity is supposed to benefit the economy by clamping down on government and "unleashing market forces", right?

Well, Ireland is the proverbial poster child for austerity. It's carved up its budget expenditures. So, how are those unleashed forces looking?

“When our public finance situation blew wide open, the dominant consideration was ensuring that there was international investor confidence in Ireland so we could continue to borrow,” said Alan Barrett, chief economist at the Economic and Social Research Institute of Ireland. “A lot of the argument was, ‘Let’s get this over with quickly.’ ”

Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.

Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent.

Oh. That sounds horrible.

Well, uh, certainly the market has rewarded Ireland for its austerity, right? For unleashing market forces and clamping down on the dead hand of government and all that?

Despite its strenuous efforts, Ireland has been thrust into the same ignominious category as Portugal, Italy, Greece and Spain. It now pays a hefty three percentage points more than Germany on its benchmark bonds, in part because investors fear that the austerity program, by retarding growth and so far failing to reduce borrowing, will make it harder for Dublin to pay its bills rather than easier.

Oh. So there has been absolutely no benefit at all. The market was unleashed, and repaid Ireland by biting down and biting hard.
So how do they hope that they'll get out of this?

Now, the government is pinning nearly all its hopes on an export revival to lift the economy. Falling wage and energy costs, and a weaker euro, have improved competitiveness.

Well, hey, it worked for Canada in the 1990s, right? Sure, Canada had its own currency (which dropped like a stone) and used that to export to a surging American economy. Sure, it's literally impossible for everybody to export their way to prosperity, especially now that Americans are no longer the buyers of last resort. Sure, it doesn't seem to be paying any dividends now, and the market appears to be punishing austerity instead of rewarding it.
But if we just believe enough, the market will reward us! Right? Right?

That's why the "unleashed market" thing is BS. It's not economics. It's not even ideology. It's faith. It's Millenialism with math.  And while faith is a nice way to sort out your moral compass and think about your place in the universe, it's no damned way to run an economy.

Krugman sums it up:

The key thing to bear in mind about calls for harsh austerity in the face of a a depressed economy is that such calls depend on two propositions, not one. Not only do you have to believe that the invisible bond vigilantes are about to strike — that you must move to appease markets, even though right now bond buyers are willing to lend money to the United States at very low rates; you must also believe that short-term fiscal cutbacks will in fact appease the markets if they do, in fact, lose confidence.

That’s why the Irish debacle is so important. All that savage austerity was supposed to bring rewards; the conventional wisdom that this would happen is so strong that one often reads news reports claiming that it has, in fact, happened, that Ireland’s resolve has impressed and reassured the financial markets. But the reality is that nothing of the sort has taken place: virtuous, suffering Ireland is gaining nothing.

Of course, I know what will happen next: we’ll hear that the Irish just aren’t doing enough, and must do more. If we’ve been bleeding the patient, and he has nonetheless gotten sicker, well, we clearly need to bleed him some more.

Damned unbelievers.

Is it Wednesday already?

Seriously, when economists wonder why the rest of us think they're clueless muttonheads with a dangerous entitlement complex, I think they can rest assured that we're talking about things like this:

“Rogue” is a good word for Levitt, but I think “contrarian” is more apt. Sadly, for Levitt’s readers and reputation, he decided to adopt the contrarian view of global warming, which takes him far outside of his expertise. As is common among smart people who know virtually nothing about climate science or solutions and get it so very wrong, he relies on other smart contrarians who know virtually nothing about climate science or solutions. In particular, he leans heavily on Nathan Myhrvold, the former CTO of Microsoft, who has a reputation for brilliance, which he and the Superfreaks utterly shred in this book:

“A lot of the things that people say would be good things probably aren’t,” Myrhvold says. As an example he points to solar power. “The problem with solar cells is that they’re black, because they are designed to absorb light from the sun. But only about 12% gets turned into electricity, and the rest is reradiated as heat — which contributed to global warming.”

Impressive — three and a half major howlers in one tiny paragraph (p 187). California Energy Commissioner Art Rosenfeld called this “patent nonsense,” when I read it to him. And Myhrvold is the guy, according to the Superfreaks, of which Bill Gates once said, “I don’t know anyone I would say is smarter than Nathan.” This should be the definitive proof that smarts in one area do not necessarily translate at all.

I trust you to realize why the quoted bit is absolute blithering idiocy. ClimateProgress goes into great detail if you're wondering, but I doubt you would be, since most people would just respond to this with a hearty "WTF?"

So what's gone wrong here? Well...

The reason I’m calling Levitt and Dubner Superfreaks for short is that Chapter Five of SuperFreakonomics, the “Global Cooling” chapter — aka “What do Al Gore and Mount Pinatubo have in common?” — has precious little economics, and what it does have is simply wrong. So the book could easily have been titled Superfreaks. [Note: Most of the book is searchable online. At the request of the publisher, I have taken down the PDF of the chapter.]

The answer is that Gore and Pinatubo’s eruption both suggest a way to cool the planet, albeit with methods whose cost-effectiveness are a universe apart.

Yes, the Superfreaks frame this chapter mostly as their (misguided) view of the science versus the views of that famous non-scientist Al Gore (as opposed to the views of all of the scientists who disagree with the crap they are peddling). That straw man approach gives them the “high” ground.

But by embracing aeresols and rejecting mitigation, they have adopted the identical view of that rogue, thoroughly debunked, non-economist Bjorn Lomborg. Unlike the Superfreaks, CP readers know that Ken Caldeira calls the vision of Lomborg’s Climate Consensus “a dystopic world out of a science fiction story.”

And yet Caldeira is the primary practicing climate scientist the Superfreaks rely on in the chapter! He has responded to many e-mail queries of mine over the weekend so I could characterize his views accurately. He simply doesn’t believe what the Superfreaks make it seem like he believes. He writes me:

If you talk all day, and somebody picks a half dozen quotes without providing context because they want to make a provocative and controversial chapter, there is not much you can do.

This is classic, classic economist behavior, where they move into another science and start babbling whatever crap comes to mind as long as it sounds good and fits their axiomatic dogma. A lot of people have already asked a lot of questions about Levitt's methodology. But as we see here, the methodology doesn't necessarily have anything to do with it, because the damned thing didn't have methodology worth the name to begin with!

It used to be that this sort of thing only happened in the social sciences and in historiography, where economists would barge in, brandishing whatever model happened to to be at hand, and proclaim that they have a solution that all the "little people" that came beforehand should just shut up and accept. Never mind that they removed all the evidence that didn't fit with all the surgical skill of a medieval barber. What was worst about this sort of dilletantism was that their statements were inevitably wrong, and did tremendous damage.

That's what we saw with Lomborg. Everybody who knows a damned thing about climate change knows that Bjorn Lomborg was completely off his rocker, and smacked him down multiple times: first when he tried to dismiss global warming, and then again when he tried to pull some sleight of hand by claiming that what he was really advocating was lovely things like malaria nets and childhood innoculation...as if it were climate change that were the problem there. But because he's an economist and therefore part of the "proper" tribe, he gets his sounding board whether he's right or not. Sure, there are other scientists who carry water for the polluters, but they're usually in fields that at least have something vaguely to do with ecology and meteorology. Lomborg is (when you get right down to it) a glorified sociologist! He has absolutely no business even discussing this field! But he does, because he gets the pass. So does Levitt.

And when these people misuse this power, as they inevitably do, it's the real scientists (and the rest of us) that inevitably have to clean up the messes. Except that with climate change, there may not be a "rest of us" to do it. But, hey, as long as it sells books, right?

The hat tip goes to Krugman. I'm a bit uncomfortable about his positioning on this one, though. I remember his old "dismal science" column, where he used to play this card with gusto. He's since recovered from his own bout of economists' entitlement. That's a good thing.

It's still important to remember that this is a serious, serious problem with social science that goes back years, not a "right wing vs. left wing" or "Krugman vs. Levitt" issue. (Privileging economists like that is the entire problem.)

It won't be solved by ideological wrangling. It'll be solved by economists rediscovering a bit of humility, and other scientists rediscovering their ability to tell that obnoxious economist to,

well,

"sit the hell down and shut the hell up".

Seems odd, but take a look:

American economists Elinor Ostrom and Oliver Williamson, who study the way economic decisions are made outside markets, were awarded the Nobel Prize in economics Monday.

Ms. Ostrom, who teaches at Indiana University in Bloomington, Ind., is the first woman to win the economics prize, which had been awarded to 62 men since its launch in 1969. The judges cited her analysis of what happens when natural resources are shared commonly.

Mr. Williamson, who teaches at the University of California, Berkeley, was cited for explaining why some decisions are made more efficiently inside corporations rather than at arm's length in markets.

Within the economics profession, neither was seen as a likely choice for the award, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Ms. Ostrom's doctorate is in political science, though she considers herself a political economist. Ms. Ostrom, 76 years old, said that when the phone rang at 6:30 a.m. Monday, she thought it might be a telemarketer. Mr. Williamson's work, meanwhile, has been highly influential on fields outside of economics. The 77-year-old has been described as the economist most cited by noneconomists.

Both have highlighted areas where standard approaches of economics are inadequate at explaining what actually occurs. "They both pay incredible attention to what happens in the real world," said Wharton School economist Witold Henisz, a former student of Mr. Williamson's.

Ms. Ostrom's work challenged the view that when people share a finite resource, they will end up destroying it -- what is known as the tragedy of the commons. That view argues that resources that are important for the common good need to be highly regulated or privatized.

As a graduate student in the early 1960s at the University of California, Los Angeles, Ms. Ostrom researched the way water was being managed in Southern California. Groundwater levels were falling, and saltwater was seeping into the system. But rather than collapsing into a tragedy of the commons, communities and water producers hashed out a solution. That led her to explore situations throughout the world where resources were commonly held, and she found that people often developed institutions, networks and other ways of interacting that solved problems.

Economists had largely ignored the importance of such networks, said Yale University environmental economist Matthew Kotchen, in part, because they couldn't come up with elegant models to describe them.

First Krugman, now this. Something very, very interesting is happening with the Sveriges Riksban.

Going on...

[Williamson] found that many economic decisions that standard theory said would be more efficiently left to the marketplace were actually better left within a firm. "Competitive markets work relatively well because buyers and sellers can turn to other trading partners in case of dissent," the Nobel judges said. "But when market competition is limited, firms are better suited for conflict resolution than markets."

This is a more profound insight than you'd think. A firm is essentially a bureaucracy, just one in a condition of competition with other bureaucracies. The practical upshot here is that markets are not always the best mode of economic organization, which is an astounding idea to even consider.

But what's even more astounding is the fact that thse two people got the award in the first place. A political economist getting the Nobel Prize in economics? Only a few years ago, that would be seen as something like sacrilege. Yet here we are.

That point about a lack of elegant models is important, too. Nobel prizes in the past have been all about elegant models. In fact, your model was probably the fastest and most predictable way to earn a Nobel. Economic history and (until now) Political Economy were nonstarters compared to things like Econometrics and Economic modelling. Yet, again, here we are, where a model-resistant theory takes the prize.

I'm not sure why, exactly, attitudes seem to have shifted. But they have. And good on' em.

(Edit: Welcome to visitor's from Brad DeLong's site. I'm a big fan of his going way back, and he's one of the economists I do respect.)

For those who haven't read Paul Krugman's devastating article about the current state of economics, this may not mean much. But, fortunately, you have the delight of reading it to look forward to.

So don't let me detain you.

For the rest of you, here's his reaction to, well, the reaction:

I gather, though, that the usual suspects are utterly outraged at my suggestion that freshwater macro has spent several decades heading down the wrong path. They’re smart! They work hard, using hard math! How dare I say such a thing?

And all of this, of course, without a hint of irony.

For when freshwater macro took over a good part of the field, its leaders gleefully dismissed all the work Keynesian economists had done over the previous few decades, often with sneers and sniggers.

And that same adolescent quality was evident in the reactions to the Obama administration’s attempts to deal with the crisis — as Brad DeLong points out, people like Robert Lucas and John Cochrane (not to mention Richard Posner, who isn’t a macroeconomist but gets his take from his colleagues) didn’t say that when serious scholars like Christina Romer based policy recommendations on Keynesian economics, they were wrong; the freshwater crowd declared that anyone with Keynesian views was, by definition, either a fool or intellectually dishonest.

So the freshwater outrage over finding their own point of view criticized is, you might think, a classic case of people who can dish it out but can’t take it.

From what I know of your more Randroid economists, this isn't a big surprise. This sophomoric nonsense is the worst damned thing about modern economists, and what makes me automatically suspect the findings whenever its axioms and methodologies crop up in other fields.

But it’s actually even worse than that.

Oh?

When freshwater macro came in, there was an active purge of competing views: students were not exposed, at all, to any alternatives. People like Prescott boasted that Keynes was never mentioned in their graduate programs. And what has become clear in the recent debate — for example, in the assertion that Ricardian equivalence rules out any effect from government spending changes, which is just wrong — is that the freshwater side not only turned Keynes into an unperson, but systematically ignored the work being done in the New Keynesian vein. Nobody who had read, say, Obstfeld and Rogoff would have been as clueless about the logic of temporary fiscal expansion as these guys have been. Freshwater macro became totally insular.

And hence the most surprising thing in the debate over fiscal stimulus: the raw ignorance that has characterized so many of the freshwater comments. Above all, we’ve seen the phenomenon of well-known economists “rediscovering” Say’s Law and the Treasury view (the view that government cannot affect the overall level of demand), not because they’ve transcended the Keynesian refutation of these views, but because they were unaware that there had ever been such a debate.

It’s a sad story. And the even sadder thing is that it’s very unlikely that anything will change: freshwater macro will get even more insular, and its devotees will wonder why nobody in the real world of policy and action pays any attention to what they say.

"Raw ignorance." Rather harsh, but I can't see how to rebut it. Saying that you disagree is one thing. That's perfectly legitimate. Saying that you teach your students one viewpoint in preference to another? That's also legitimate. Spending more time on one school of thought instead of another? Kind of questionable, but still ubiquitous.

But not even teaching what Keynes was about? That's not even wrong. That's just ignorant. No, not "ignorant" as an epithet, it quite literally breeds ignorance. That's not being an educator. That's the game of indoctrinators. Cults do that.

I knew freshwaters was screwed up. But I have to admit, I wasn't expecting cultists.

Edit: Some of the commentators bring up John Cochrane's response, which includes rather a lot of "if markets are irrational, surely government regulators are even MORE irrational!" That strikes me as a clarion call to shut down the FDA. But never mind that. Take a look at this howler:

Paul, there was a financial crisis, a classic near-run on banks. The centerpiece of our crash was not the relatively free stock or real estate markets, it was the highly regulated commercial banks. A generation of economists has thought really hard about these kinds of events. Look up Diamond, Rajan, Gorton, Kashyap, Stein, and so on. They’ve thought about why there is so much short term debt, why banks run, how deposit insurance and credit guarantees help, and how they give incentives for excessive risk taking.

Yes. The problem of widespread speculation in almost totally unregulated markets like CDOs and credit default swaps—by investment banks like Lehman and Goldman Sachs—was the regulation on commercial banks.

Riiight.

What parts aren't "gub'mint is worse!" or "Paul just doesn't understand us beautiful flowers" are generally "you're trying to turn back the clock on 30 years of science!" As seen here:

Imagine this were a respected scientist turned popular writer, who says, most basically, that everything everyone has done in his field since the mid 1960s is a complete waste of time. Everything that fills its academic journals, is taught in its PhD programs, presented at its conferences, summarized in its graduate textbooks, and rewarded with the accolades a profession can bestow, including multiple Nobel prizes, is totally wrong. Instead, he calls for a return to the eternal verities of a rather convoluted book written in the 1930s, as taught to our author in his undergraduate introductory courses. If a scientist, he might be a global-warming skeptic, an AIDS-HIV disbeliever, a creationist, a stalwart that maybe continents don’t move after all.

This is one of the goofiest damned things I've ever read.

It's not even argument from authority. Leave aside the arrogance of assuming that one branch of thought could stand in for the entire field. These sorts of reversals happen all the time, and especially in social sciences. Would linguists get away with this sort of whining if they were trying to rebut Chomsky? Would behavioral psychologists be able to use this as a response to cognitivism? Would IR liberals be able to beat back realists (or vice versa) by saying that they're based on old books? Would the vaunted criminal "profilers" be able to use it to rebut the growing tide of people who question the efficacy of their methods?

No, of course not. Even the crustiest, most hidebound Marxian would laugh at the attempt. Only the most ignorant, closed sort of mind would even try.

But here we are, with Cochrane proving the point about Freshwater insularity and ignorance more eloquently than Krugman could have ever dreamed.

Er, yeah, this is worrisome.

What’s been happening in financial markets over the past few days is something that truly scares monetary economists: liquidity has dried up. That is, markets in stuff that is normally traded all the time — in particular, financial instruments backed by home mortgages — have shut down because there are no buyers...

...yesterday’s announcement by BNP Paribas, a large French bank, that it was suspending the operations of three of its own funds was, if anything, the most ominous news yet. The suspension was necessary, the bank said, because of “the complete evaporation of liquidity in certain market segments” — that is, there are no buyers.

When liquidity dries up, as I said, it can produce a chain reaction of defaults. Financial institution A can’t sell its mortgage-backed securities, so it can’t raise enough cash to make the payment it owes to institution B, which then doesn’t have the cash to pay institution C — and those who do have cash sit on it, because they don’t trust anyone else to repay a loan, which makes things even worse.

And here’s the truly scary thing about liquidity crises: it’s very hard for policy makers to do anything about them.

The Fed normally responds to economic problems by cutting interest rates — and as of yesterday morning the futures markets put the probability of a rate cut by the Fed before the end of next month at almost 100 percent. It can also lend money to banks that are short of cash: yesterday the European Central Bank, the Fed’s trans-Atlantic counterpart, lent banks $130 billion, saying that it would provide unlimited cash if necessary, and the Fed pumped in $24 billion.

But when liquidity dries up, the normal tools of policy lose much of their effectiveness. Reducing the cost of money doesn’t do much for borrowers if nobody is willing to make loans. Ensuring that banks have plenty of cash doesn’t do much if the cash stays in the banks’ vaults.

There are other, more exotic things the Fed and, more important, the executive branch of the U.S. government could do to contain the crisis if the standard policies don’t work. But for a variety of reasons, not least the current administration’s record of incompetence, we’d really rather not go there.

I remember seeing Kramer on the Colbert Report a few days ago, and how worried and freaked out he was over the market. Krugman is a little more bearish compared to Kramer, so this is no big surprise that he's on this, but things really do appear to be going a bit topsy-turvy.

(Hat Tip Sideshow.)