The legacy of Larry Summers

The legacy of Larry Summers – FOR two years the Obama Administration’s economic policy has been caricatured from the right as an invasive expansion of government and from the left as a cowardly capitulation to Wall Street free market fundamentalism. How can it be both things at once? It helps to understand the philosophy of the man who most embodies that policy, Larry Summers, who today delivered perhaps his final public speech as Barack Obama’s National Economic Council director. The "Summers Doctrine" fuses microeconomic laissez faire with macroeconomic activism. Markets should allocate capital, labour and ideas without interference, but sometimes markets go haywire, and must be counteracted forcefully by government.
  Russian billionaire Prokhorov Backs Yo, a New Hybrid Car – Mikhail D. Prokhorov, the Russian billionaire who owns the New Jersey Nets basketball team, rolled out another pet project on Monday: Russia’s first gas-electric hybrid car.  It is called the Yo, for the Russian letter “ë,” and it can use either gasoline or natural gas to generate its electric power.  Proponents say the Yo makes use of Russian engineering innovations but can be priced for mass consumption because of its bare-bones approach to hybrid automotive technology.  While two electric motors propel the Yo, a small petroleum engine that can burn either gasoline or natural gas will run nearly continuously to generate the electricity they consume. Instead of charging a battery, as in the hybrid Toyota Prius, the generator in the Yo either powers the motors directly or fills a bank of capacitors that can hold only a small charge.  The designers say that at about 67 miles per gallon, the Yo will achieve better fuel economy than the Toyota Prius (about 51 miles per gallon), in part because it is lighter. Like other gas-electric hybrids, it will also have a total range far beyond that of a pure plug-in electric car like the newly introduced Nissan Leaf.

Judge Voids Key Element of Obama Health Care Law – A federal judge in Virginia ruled on Monday that the keystone provision in the Obama health care law is unconstitutional, becoming the first judge to invalidate any part of the sprawling act and ensuring that appellate courts will receive contradictory opinions from below.  The judge, Henry E. Hudson of Federal District Court in Richmond, said the law’s requirement that most Americans obtain insurance exceeded the regulatory authority granted to Congress under the Commerce Clause.  Judge Hudson, who was appointed by President George W. Bush, declined the plaintiff’s request to suspend the act’s implementation pending appeal, meaning there should be no immediate effect on its rollout.

Default and bankruptcy in the municipal bond market – One of the more frustrating aspects of muni market coverage in the news and blogosphere is the tendency to talk about municipal debt as if only one type of bond is issued and traded.  There is actually considerable diversity among borrowers in the muni market (e.g., they are not all government entities), and by extension, the types of commitments that are made for the repayment of the debt.  Although the relative health of the muni market has macroeconomic consequences, this is in many ways a market that defies generalization.  The defaults that have taken place both before and during the economic downturn are what finance-types would refer to as storied credits.  I often see people describing Jefferson County, Alabama, as the “canary in the coal mine” of muni defaults.  Suggesting that Jefferson County, which was the center of a widely-publicized securities fraud case, is a typical muni credit is kind of like portraying Enron as a typical corporate credit.  Another example would be Florida dirt bonds, which are backed by special assessments on property in a severely depressed market.  .

Incoming GOP Financial Services Chairman: Washington’s Role Is “To Serve The Banks” – During the financial reform debate, Rep. Spencer Bachus (R-AL) — who will become chairman of the House Financial Services Committee in the 112th Congress — continually criticized the reform effort. He falsely characterized the legislation that ultimately became the Dodd-Frank financial reform law as creating “permanent bailout authority,” and he staunchly opposed the creation of the new Consumer Financial Protection Bureau. Now that he’ll be taking the Financial Services committee gavel, Bachus has telegraphed his intention to weaken some of the bill’s most important sections, including derivatives reform and rules meant to prevent banks from making risky trades with federally insured dollars. In an interview with The Birmingham News, Bachus made it clear why he opposed stricter regulations for banks in the wake of a huge financial crisis largely caused by Wall Street excess and a lack of prudent regulation. In Bachus’ estimation, the government’s role is not to protect consumers and the wider economy through regulating financial activity, but to simply “serve the banks”:

How Hedge Funds Create Criminals – Hedge funds are playing the role of Wall Street villain again. This time, the charge is rampant insider trading. First came the 2009 arrest of Raj Rajaratnam, founder of the Galleon Group. Then came the November 22, 2010 raids of three hedge fund headquarters by FBI agents who seized documents and confiscated BlackBerries. Now authorities are serving subpoenas on other, larger hedge and mutual funds. Attorney General Eric Holder has announced the government’s widening investigation is "ongoing" and "very serious." (Recently, though, Jesse Eisenger in the New York Times called these investigations a "side show.") These events raise suspicion that many hedge fund traders may have succeeded at beating the market not through careful research and original analysis but by breaking the law. The question, then, is, Why does a large slice of the hedge fund industry seem to have succumbed to illegal behavior?

Obama haters praise his tax policies because they believe those policies will make him fail – Like the Sirens reputed to lure sailors onto rocks, a series of columnists who want President Obama to fail are praising Obama’s capitulation on extending the Bush tax cuts for the wealthy. The motif of these comments has three common characteristics – all designed to destroy the Obama presidency. First, and the chutzpah of this aspect is wondrous, those that hate Obama’s policies are telling Obama he is demonstrating his strength by surrendering on the Bush tax cuts to the wealthy. Second, they claim that Obama “moved to the center” by agreeing to support tax cuts for the wealthy. Third, they claim that Obama’s attacks on his strongest supporters are brilliant politics essential to saving his Presidency. Dana Milbank’s recent column is one example of the three-part motif. The title of the column captures the first aspect: “Obama finally stands his ground." What he means of course is that Obama failed to stand his ground, repudiating his promises to end the Bush tax cuts for the wealthy.

The Seven Myths of ‘Slums’ – For anyone who takes an interest in the problem of slums, a few basic facts will soon become clear. Firstly, the locus of global poverty is moving from rural areas to the cities, and more than half the world population now lives in urban areas for the first time in human history. Secondly, most of the world’s urban population, most of its largest cities and most of its urban poverty is now located in Africa, Asia and Latin America – the so-called developing world. Thirdly, the growth in slums since the 1980s is both formidable and unprecedented (even though urban slums have existed in Europe since the Industrial Revolution), and the number of slum-dwellers worldwide is expected to continually increase in the decades ahead.  Beyond these facts, there seems to be little awareness about the reality of slums in the popular imagination. Thanks to the tireless work of many activists and non-governmental organisations over many decades, the issue of global poverty is now high on the international policy radar – but the issue of slums, which forms a major component of poverty in urbanising cities, still fails to register in most people’s concerns

Evolution of Eurozone Trade Balance – The OECD has a new survey out of the Euro area economy, including some slides (slides) from Pier-Carlo Padoan: Among other things, you see here another illustration of the point that there’s something very simplistic about the “Germany has high net exports because we make good cars” theory of global trade flows. BMW made good cars in the 1990s, too, but Germany ran modest trade deficits at that point. And if Germans (and Dutch, Austrian, Swedish, etc.) households started buying more consumer goods (or, equivalently, taking more vacations) the growth outlook for neighboring countries would be better. But this wouldn’t just be a favor to the people of Spain, Germans would actually have more stuff. The Schröder government undertook a lot of politically difficult reforms in order to boost German productive capacity. But presumably the point of this was to actually reap more rapid increases in living standards and not just to try to win some kind of global exports championship.
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