Chronicle of the Conspiracy
Saturday, August 23, 2003
"Real investment in high-tech equipment has been running at a world-record pace for several quarters now. But what's different about this piece of good news is that demand is finally strong enough for capital-equipment producers like Intel to actually make some money."Let's see what DeLong says next time Krugman claims there's no economic recovery. Oh what a tangled web we weave, when first we set out to defend Krugman's deceptions. For DeLong, merely straight-out lies would be an improvement.
Posted by Donald L. Luskin at 2:51 PM | link
Friday, August 22, 2003
But should this idea really be new to an economics professor? I would have expected he'd understand that "...real interest rates should be determined by Federal Reserve policy and by opportunities for profitable investment produced by expectations of economic growth." The yield of a particular bond, on the other hand, is determined "by 'technical' factors in the bond market--specifically, the endogenous and poorly-understood duration of mortgage-backed securities...distorted by technical factors, noise, and bubbles."
The quotes in the preceding paragraph, by the way, come from DeLong's own rebuttal. (How embarrassing.)
Update... For some reason, I don't quite believe that DeLong is being entirely honest with us when he says that this his "first expedition" to my website.
Posted by Donald L. Luskin at 12:19 AM | link
Thursday, August 21, 2003
Posted by Donald L. Luskin at 11:23 PM | link
Wednesday, August 20, 2003FAITH-BASED REREGULATION -- READERS RESPOND We got some great emails from readers on "Krugman's Faith Based Reregulation" [8/20/2003]. Click here to go to our letters page, and scroll down to read them all.
Posted by Donald L. Luskin at 11:48 PM | link
But after that admission that he doesn't know what caused The Blackout, he proceeds to spend the next 649 words of his column telling us exactly what caused The Blackout. Can you guess? The culprit is "faith-based deregulation."
Of course it doesn't have anything whatsoever to do with President Bush's idea for using faith-based institutions to privatize the delivery of government social services. Krugman just uses that expression to sideswipe Bush in the process of criticizing the advocates of deregulation. His point is that as the partial deregulation of the electricity industry progressed over the last decade, the transmission grid did not properly adapt, and "politicians and deregulation enthusiasts simply had faith that somehow 'the market' would take care of the problem."
And what exactly is the problem? Though he is an economics professor, this confused explanation is apparently the best that Krugman can do to illuminate it. Bear with me here...
To unravel all this, I had a long conversation yesterday with Lynne Kiesling, director of economic policy at the Reason Foundation, and a senior lecturer in the department of economics at Northwestern University (Lynne runs the Knowledge Problem blog that focuses on power policy issues -- and incidentally, she has a wonderful op-ed on this subject in today's Wall Street Journal, co-authored with Nobel Prize-winning free markets economist Vernon Smith).
While Kiesling comes solidly from the deregulation tradition, she agrees with several things that Krugman says here. For one, the problem is not that electricity transmission has been deregulated. Kiesling notes that, indeed, it's more heavily regulated than ever -- and as Krugman himself concedes, that's part of the industry's financial problem. As the Rebecca Smith reported Monday in the Wall Street Journal, "Many power companies have simply stayed away from building new towers and high-power lines because they don't want the hassle of a public fight. Another concern is split jurisdiction: States control where lines can be built, but the federal government usually sets rates." Or as Kiesling puts it, "Our regulatory institutions were not built for a cross-border industry, but the industry has become cross-border."
And Kiesling agrees with Krugman that the deregulation of power generation has put new demands and stresses on power transmission. But where Kiesling and Krugman part company is in what to do about it. While Krugman concedes that the regulation of transmission imposes financial hardships on it, his solution is to impose even more regulation (and he strongly implies that he would favor re-regulation of the generation side of the business, too).
And according to Krugman, what stands in the way of that needed regulation? The Bush administration and the Republican Party -- of course. Krugman gripes that
He is referring to the Federal Energy Regulatory Commission's proposed Standard Market Design (SMD), a federalized regulatory framework for the transmission industry. It's an out-and-out lie to suggest that SMD is being delayed because of "pressure from Senate Republicans." The truth is that SMD is a sweeping regulatory regime-change that has both friends and enemies on both sides of the aisle. For example, Kiesling told me that the state of Washington would be disadvantaged under SMD relative to the status quo ante thanks to its current reliance on the heavily federally subsidized New Deal-era Bonneville Power Administration. So Washington's Democratic Senator Maria Cantwell has worked aggressively to delay SMD implementation -- "despite the blackout," as Krugman might say.
So this is where Krugman and Kiesling sharply part company. Kiesling would hold that politicians of both parties are correct not to want to rush into a regulatory regime change -- because if The Blackout has taught us anything, it is that the stakes are high in making the right decision. And according to Kiesling, we can't make the right decision, because as long as regulation fixes the retail price of electricity, "we don't know bupkis."
What she means is that, without price signals to tell producers what to supply and at what level of reliability, and to tell consumers what to demand and with what usage patterns, we really have no idea how to design an electricity industry. In Kiesling's framework, the challenge is to develop an environment in which an electricity industry can safely design itself.
With regulation, we have -- as Krugman himself admits! -- a necessarily subsidized world in which there is "little financial incentive to invest in maintaining and upgrading the system." We have a government-induced reality-distortion field in which electricity consumers can write atta-boy letters to the New York Times praising Krugman's column, whining that "We shouldn't have to make choices about electricity. It should be there for all of us, like air and water."
That's what Krugman wants more of? Talk about faith-based!
Correction [8/20/2003]... Through an editing error, the Federal Energy Regulatory Commission was incorrectly referred to as the Federal Electricity Regulatory Commission. It has been corrected in the text above.
Posted by Donald L. Luskin at 2:41 AM | link
Tuesday, August 19, 2003
Posted by Donald L. Luskin at 8:26 AM | link
Anyway, what's the diff? Who needs to even read it? Here, instead, are the winners of our first Faux Krugman contest!
Robert B. Sparks:
Posted by Donald L. Luskin at 2:06 AM | link
Monday, August 18, 2003
Indeed it might -- so let's do it! You can send opening and closing paragraphs as Bruce suggests, or the whole thing if you want. Remember, a Krugman column is always 765 words. Send it as soon as possible to email@example.com. Winners will be posted here and on National Review Online. The contest ends when Krugman's column goes up tonight on the Times web site.
Posted by Donald L. Luskin at 3:04 PM | link
And how does shutting down commercial life for 20% of the American population "serve the interests of Big Business" or "the oil industry"? The reality is that Big Business has been chomping at the bit to earn a fair profit upgrading America's electrical transmission infrastructure. But environmental and economic regulations -- put in place by a half century of Democratic congresses -- have effectively legislated away any hope of gain (and any hope of upgrading).
Anyone want to take a bet? Krugman's New York Times column tomorrow will be a litany of infrastructure horror stories of all sorts -- from potholes on up -- and it will all be blamed on the "denial and deceit" of the Bush administration. Who'll fade me? Give me 2-to-1 on the topic, with a special double 4-to-1 payoff if he uses the expression "denial and deceit." Email me at firstname.lastname@example.org. I'm serious. We'll settle via PayPal.
Posted by Donald L. Luskin at 10:57 AM | link
The headline says it all: "Mortgage Markets Are Out of Control." So Morgenson must believe that other markets are in control. Who controls them? Who controls the stock market, or the pork belly futures market -- are any other market? What is so wonderful about markets is precisely that everyone controls them -- and yet no one does. That seeming self-organizing quality of markets is what makes them so effective in price discovery and resource allocation -- and what makes them so threatening to elitists like Morgenson, who believe that everything of importance should be under state control (with the state to be controlled by people like... them).
The essence of Morgenson's column is that interest rates are now being determined by the mortgage-back security market, which is now the single largest sector of the US bond market. She explicitly dismisses the idea that interest rates are determined by economic growth expectations. That, she says, is only believed by "folks wearing the rose-colored shades" -- as though the whole idea that economic growth could possibly be accelerating is simply a delusion.
No, what determines interest rates "is a force so large and brutish that it
could propel rates higher and faster than many investors expect: the huge
mortgage-backed securities market and the leveraged traders who call it home."
Okay, there's nothing basically wrong with that explanation of increased Treasury volatility. Although my friend Jameson Campaigne noted in an email to me that much the same point was made last week in much the same language in the August 2003 Whitebox Market Observer -- oh, surely a coincidence! A Pulitzer Prize winner like Morgenson would never plagiarize from a publication affiliated with her old boss Steve Forbes...
Be that as it may, to the extent that the fixed income market has become increasing populated by high-convexity securities, there will be some spill-over to lower-convexity securities, insofar as all markets are linked. This is entirely natural and basically harmless (and probably averages out over time). If there are some market participants who would rather that Treasury yields not be so volatile as a result of this effect (or any other), well... there are many nice things that one can wish for, but the fact that one must wish does not mean that there is anything wrong in the world. It just means one must do something to earn one's wish -- other than kvetching.
And none of this says anything about what determines interest rates. However mortgage rates and Treasury rates are determined, neither of them are interest rates per se -- they are both nothing more than the yields of particular securities that reflect interest rates (just as stocks, and -- to differing extents -- everything else in the economy reflects interest rates). Interest rates are an abstraction. They are, by definition, the opportunity cost of money across time -- and opportunity cost is a function, mostly, of expected growth rates and expected inflation.
Thus Morgenson's explanation of rates being determined by mortgage trading is left looking very much like that so-called "proof" of the existence of God holds him to be the "prime cause." One can ask, "what caused God?" If moves in mortgage rates are the prime cause of interest rates, one can ask what moved mortgage rates? The answer is -- expected growth rates and expected inflation. Opportunity costs.
Morgenson inadvertently confesses as much, in a paragraph that she must not realize contradicts her entire thesis. Immediately after explaining how mortgage traders "helped push interest rates down to ridiculous levels earlier this year" and then later made "interest rates spike," Morgenson states,
Huh? First she says that the violent move in rates are caused "mortgage-backed securities market and the leveraged traders who call it home." Then, without taking a breath, she cites an explanation that has nothing to do with the mortgage market whatsoever. I have no idea (and either does Morgenson) what, if anything, "traders feared" last week. But at least this explanation gets to one of the true definitional drivers of interest rate changes -- inflationary expectations. Such expectations move mortgage markets and Treasury markets (and those two markets move each other, too, as all markets move each other to some extent).
Having described -- and contradicted -- a problem that is not a problem, Morgenson looks for a scapegoat. And so the inevitable conclusion to a Gretchen Morgenson column -- the pointing finger, and the dire warning:
Why not say just the reverse? It works too: "these traders drove down rates, impoverishing investors, savers, retirees and companies invested in money market funds. Now, it is higher income -- and all its delightful implications -- for which everyone must prepare." Why didn't she include that perspective? Because the conspiracy to keep you poor and stupid requires that think of the market as a terrifying place where you are a likely victim of people who deliberately "create such havoc." When you think that, you'll want to be protected. And there is no shortage of politicians and regulators -- and the journalists who pimp for them -- who are only too happy to protect you... right into poverty.
Correction [8/18/2003]... Due to a simple typographical error of the kind that cannot be caught by spellchecking, as originally posted, I wrote that the mortgage backed securities market "is not the single largest sector of the US bond market." The word not should have been now. Thanks to Robert Musil of the Man Without Qualities blog for pointing this out.
Posted by Donald L. Luskin at 1:40 AM | link