Encouraging Zimbabwe Ben

"There's a good chance that unemployment will rise, not fall, over the next year. But even if it does inch down, one has to ask: Why isn't the Fed trying to bring it down faster? ... You can't just look at the 8 million jobs that America has lost since the recession began, because the nation needs to keep adding jobs--more than 100,000 a month--to keep up with a growing population. And that means that we need really big job gains, month after month, if we want to see America return to anything that feels like full employment ... So if we're going to have any real good news, someone has to take additonal responsibility for creating a lot of additonal jobs. And at this point, that someone almost has to be the [Fed]. ... Joseph ... Gagnon urges the Fed to expand credit by buying a further $2 trillion in assets. Such a program could do a lot to promote faster growth, while having hardly any downside. So why isn't the Fed doing it? ... Meanwhile, a significant number of Fed officials, especially at the regional banks, are obsessed with the fear of 1970s-style inflation, which they see lurking just around the bend even though there's not a hint of it in the actual data", my emphasis, Paul Krugman (PK) at the NYT, 11 December 2009, link:

http://www.nytimes.com/2009/12/11/opinion/11krugman.html.

PK resurrects the Phillips Curve here. If Uncle Miltie proved anything it is: inflation is always a monetary phenonenom. PK wants Zimbabwe Ben (ZB) to double the monetary base again, which ZB more than doubled over the last 18 months! If you have US dollar bonds, sell. Imagine, PK holds a Nobel Prize. What a farce. PK, why is the US population growing? Could the US reduce its population growth? Hint: end illegal immigration.

Anderson Slams Krugman

William Anderson (WA) slams Paul Krugman's (PK) recent NYT piece, 10 September 2009, link: http://williamlanderson.blogspot.com/2009/09/like-other-economists-krugman-also-gets.html. I can't even put this under an economics tag, PK is so far out in left field. PK ceased being an economist with pieces like this.

Paul Krugman, Surely You're Joking

"It's hard to believe for now, but not long ago economists were congratulating themselves over the success of their field. Those successes--or so they believed--were both theoretical and practical, leading to a golden era for the profession. ... And in the real world, economists believed they had things under control: the 'central problem of depression-prevention has been solved,' declared Robert Lucas of the University of Chicago in his 2003 presidential address to the American Economics Association. ... Few economists saw our current crisis coming. ... 'The General Theory' is a work of profound, deep analysis", Paul Krugman (PK) at the NYT, 6 September 2009, link: http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html.

If you have the stomach for it, read PK's piece. For my money, it's garbage. PK was born in February 1953 making him 17 months younger than your truly. One would hope PK's knowledge of the history of economic thought was at least equal to mine. He's an economics professor. Hahahahahaha. Economists thought they had the business cycle controlled during the New Frontier. Boy were they wrong. I remember. It seems the same failed economic nostrums resurface every 25 years or so, with new names. Unsurprisingly, PK fails to mention Austrian economics once in his 16-page tome. That's how obscure Austrian economics is.

The Fed's Real Work

"'So it seems that we aren't going to have a second Great Depression after all,' wrote New York Times columnist Paul Krugman last week. 'What saved us? The answer basically, is Big Government. ... [W]e appear to have averted the worst: utter catastrophe no longer seems likely. And Big Government, run by people who understand its virtues, is the reason why.' This is certainly a novel theory of the business cycles. To be taken seriously, however, any such explanation of recessions and recoveries must be tested against the facts. It is not enough to assert the US economy would have experienced a 'second Great Depression' were it not for the Obama stimulus plan. ... But the federal government didn't slash spending in the early '30s. ... Christina ... Romer also noted that 'recessions have not become noticeable shorter' in the era of Big Government. In fact, she found the average length of recessions from 1887 to 1929 was 10.3 months. If the current recession ended in August, then the average postwar recession lasted one month longer--11.3 months. The longest recession from 1887 to 1929 lasted 16 months. ... And bankers had no [Fed] to bail them out until 1913. Yet recessions after the Fed was created soon turned out to be much deeper than before (1920-21, 1929-33, 1937-38) and often more persistent", Alan Reynolds at the WSJ, 21 August 2009, link: http://online.wsj.com/article/SB10001424052970203863204574347000967657192.html.

As Yves Smith would say, creating longer, deeper recessions is a Fed "feature, not a bug". Kill this monster. Bankers had no Fed? Does the Fed encourage them to take risks they otherwise wouldn't? What other responsibility has the Fed? Creating inflation. From 1792-1913, the US "price level" was stable. Since 1913 the dollar's gold value has declined 97.9%. Was this by mistake or design?

Princeton Circles the Wagons

"I'm a big advocate of much strengthened financial regulation. One argument I don't buy, however, it that we should try to shrink financial institutions down to the point where nobody is too big to fail. Basically, it's just not possible", Paul Krugman (PK) at the NYT, 18 June 2009, link: http://krugman.blogs.nytimes.com/2009/06/18/too-big-to-fail-fail/

"But, apparently, for those who are sufficiently hawkish, the recent activities of the [Fed] conjure up visions of inflation. ... Yes, these moves are unusual, but these are unusual times. Concluding that the Fed is leading us into inflation assumes a degree of incompetence that I simply don't buy. Let me explain. First, the clear and present danger, both now and for the next year or two, is not inflation but deflation. Using the 12-month change in the [CPI] as the measure, inflation has now been negative for three consecutive months. ... But history teaches us that weak economies drag down inflation--and ours will be weak for some time. Core inflation near zero, or even negative, is a live possibility for 2010 or 2011. ... Ben S. Bernanke, the Fed chairman, is a keen student of the 1930s, and he and his colleagues have been working overtime to dodge the deflation bullet. ... The mountain of reserves on banks' balance sheets has, in turn, filled the inflation hawks with apprehension. But their concerns are misplaced. ... The Fed is well aware of the exit problem. It is planning for it, it is competent enough to carry out its responsibilities and has committed itself to an inflation target of just under 2 percent. Of course, none of that assures us that the Fed will hit the bull's-eye. It might miss and produce, say inflation of 3 percent or 4 percent at the end of the crisis--but not 8 or 10 percent. ... SKEPTICAL? Then let's see what the bond market vigilantes really think. The market's implied forecast of future inflation is indicated by the difference between the nominal interest rates of regular Treasury debt and the corresponding real interest rates on ... TIPS. ... But on Friday, the five-year expected inflation rate was about 1.6 percent and the 10-yerar expected rate was about 1.9 percent", original capitals, my emphasis, Alan Blinder (AB) at the NYT, 21 June 2009, link: http://www.nytimes.com/2009/06/21/business/economy/21view.html.

"In contrast the Fed wants us to believe that there is so much 'slack' in the economy--economists call this the output gap--that there is nothing to worry about, inflation won't happen. What the Fed and the ECB have in common is a 'trust us' attitude, telling us that as long as we put our faith into the mighty hands of central bankers, we will be fine. And that's where the fundamental problem lies: rational investors ought to make investment decisions based on an evaluation of facts, not based on nice talk by central bankers. ... Don't understimate the Fed, though: unless the public and foreign lenders completely lose confidence in the Fed, it has the power to control inflation expectations in the medium term. ... The real question, however, is whether the Fed is going to follow through on its promise to keep inflation in check. ... The Fed may actually want to have inflation push up home prices. ... In our assessment, the scenario the Fed would favor is a prolonged period of elevated inflation; some estimates are from 4% up to 7% or 8%; others higher", my emphasis, Axel Merk (AM) 24 June 2009, link: http://www.financialsense.com/fsu/editorials/merk/2009/0624.html.

Thanks YS for this. Why PK? I'm waiting. I'll be blunt PK, I'm not your student so can be. Give me an "F". See if I care. You figure in return for supporting and letting TBTF banks exist, they will facilitate wealth redistribution to whatever groups Uncle Sam and you support. How right am I?

Princeton's economics department produces luminaries like: PK, Zimbabwe Ben (ZB) and AB. Smart guys all. But unscrupulous propagandists! How thoughtful AB, to invite my response. "Degree of incompetence"? No way. ZB is smart. He knows what he's doing. Yes old ZB is a keen student of the 1930s. Unfortunately he apparently knows little if anything of 1920s Germany. What is the Fed's real "bull's-eye"? I say its an inflation rate over 8-10 percent, see my 4 July 2008 post: http://skepticaltexascpa.blogspot.com/2008/07/sovereign-debt-risk.html. Is something strange in Princeton's water? Or does its economics department require all members take a mafia-like omerta oath to support the Fed. It seems AB and PK are peddling a modernized Phillips Curve. I'll say again, "Got gold? Get more. Got bonds? Nitwit"! AB, may you only own 30-year Treasury bonds and hold them to maturity. That would please even the Mikado's Lord High Executioner. PK, you've been singing this song for a while, see my 23 June 2009 post: http://skepticaltexascpa.blogspot.com/2009/06/krugman-exposes-himself.html. At least some economists disagree with the "Princeton Three", like Harvard's Ken Rogoff cited on 12 May 2009 here: http://voxeu.org/index.php?q=node/3551.

I am in substantial agreement with AM. The "Fed wants up to believe". Yes boys and girls, clap hands so Tinkerbelle may live.

Krugman Exposes Himself

"Suddenly it seems as if everyone is talking about inflation. Stern opinion pieces warn that hyperinflation is just around the corner. And markets may be heeding these warnings: Interest rates on long-term government bonds are up, with fear of future inflation one possible reason for the interest-rate spike. But does the big inflation scare make any sense? Basically, no--with one caveat I'll get to later. And I suspect that the scare is at least partly about politics rather than economics. ... It's important to realize that there's no hint of inflationary pressures in the economy right now. ... Deflation, not inflation, is the clear and present danger. ... Some claim that the [Fed] is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the US government to inflate away its debt. ... So is there any reason to think that inflation is coming? ... All of this raises the question: If inflation isn't a real risk, why all the claims that it is? ... But when it comes to inflation, the only thing we have to fear is inflation fear itself", my emphasis, Paul Krugman (PK) at the Houston Chronicle, 30 May 2009.

Come on PK, you're a smart guy. What gives? Is this your best "Timmy Boy" imitation? My guess: you are giving Zimbabwe Ben (ZB) a justification to monetize more debt. Did you give your old Princeton buddy, ZB the "secret handshake" which means, "run those presses"? Stop. ZB doesn't need any encouragement! PK, if you are short gold and will hold that short for the next ten years, I will believe you believe what you wrote.

Mish on the Glut

Mike Shedlock demolishes the supposed savings glut which Zimbabwe Ben and our newest Economics Nobel Laureate Paul Krugman favor at his Global Economic Analysis, 7 April 2009, link: http://globaleconomicanalysis.blogspot.com/2009/04/neither-krugman-nor-bernanke-can.html. Read. Enjoy and realize how bad the current state of economic analysis is.

Barro on Krugman and Taxes

Robert Barro, Harvard economics professor was interviewed by the Atlantic. The 11 February 2009 WSJ, has some excerpts: "I take it that you are fairly skeptical in general that fiscal policy will boost aggregate demand. Barro: Right. There's a big difference between tax rate changes and things that look like throwing money at people. Tax rate changes have actual incentive effects. ... Do you read Paul Krugman's blog? Barro: Just when he writes nasty individual comments that people forward. ... He just says whatever is convenient for his political argument. He doesn't behave like an economist".

I agree with Barro. See my 10 February 2009 post about tax incentives, link: http://skepticaltexascpa.blogspot.com/2009/02/no-stimulus-tax-cuts.html.

Mish on Magic

"No modern American president would repeat the fiscal mistake of 1932, in which the federal government tried to balance its budget in the face of a severe recession. The Obama administration will put deficit concerns on hold while it fights the current crisis. But even as Washington tries to rescue the economy, the nation will be reeling from the actions of 50 Herbert Hoovers--state governors who are slashing spending at a time of recession, often at the expense of their most vulnerable constituents and of the nation's economic future. These state-level cutbacks range from small acts of cruelty to giant acts of panic--from cuts in South Carolina's juvenile justice program, which will force young offenders out of group homes and into prison, to a decision by a committee that manages California state spending to halt all construction outlays for six months. ... They're cutting back because they have to--because they're caught in a fiscal trap. ... Think about it: Is America--not state governments, but the nation as a whole--less able to afford help to troubled teens, medical care for families, or repairs to decaying roads and bridges than it was one ortwo years ago? Of course not. ... Why can't we keep doing good things? ... An educated populace is a national resource. Why, then, is basic education mainly paid for by local govenments, which are forced to neglect the next generation every time the economy hits a rough patch", my emphasis, Paul Krugman at the Houston Chronicle, 31 December 2008.

Michael Shedlock has a 2 January 2009 post about "something for nothing ideas", which exposes much of what appears to be economic "thought" as nonsense, link: http://www.globaleconomicanalysis.blogspot.com/2009/01/how-something-for-nothing-ideas-become.html. Mish's conclusions are: "Those with money control policies in Congress. ... Inflation (expansion of money and credit) is a stealth tax (theft), demolishing the middle class over time. Inflation allows the government to collect more every year in property taxes, sales taxes, income taxes, etc., typically to pay for war mongering and social redistribution activities. ... Academia is a breeding ground for socialists. ... People want to believe someone is in charge. ... People want to trust the experts. ... There is an overwhelming propensity by everyone to seek something for nothing".

PK is a Nobel Prize winning economist. Read the bold items. This looks like emotive rhetoric to me, not economic arguments. PK uses his notoriety to advocate policy. Did PK ever find a spending program he did not like? PK is not concerned about being cruel to savers. He should advocate the "euthanasia of the renter" and get on with it. I think PK knows he advocates this, he just more highly values "his people", i.e., tax recipients than savers. PK has contempt for federalism and people's freedom to move to avoid taxation. Look at California. At present trends by 2030 only two classes (Marxist term) will live there: Hollywood movie stars and illegal aliens and their progeny. I suspect California wil be bankrupt long before then. "The nation as a whole" means who good professor? Who gets, who pays? What are these good things? Seizing people's savings through interest rate suppression? Taxing the productive to support the unproductive? Abraham Lincoln said something about this, my 30 November 2008 post: http://skepticaltexascpa.blogspot.com/2008/11/more-good-news.html. Federalize everything is PK's answer and he will decide where to spend the money. "National resource"means what PK? If it is, does that mean Uncle Sam owns that resource and we should repeal the 13th Amendment? PK's rhetoric sounds like Jeffrey Garten's, here:

Compare Mish's comments to those of PK.

Mish on Krugman

Mike Shedlock blasts Paul Krugman for maintaining his "hangover theory", 29 December 2008. CV Myers and Henry Hazlitt demolished Keynesianism over 30 years ago. Mish also has a link to a Fred Thomson video worth seeing. Link: http://www.globaleconomicanalysis.blogspot.com/2008/12/krugman-still-wrong-after-all-these.html.

Mad Dog and the SEC

"The stunning fraud Wall Street pillar Bernard Madoff [BM] is accused of has raised questions about whether federal regulators were lax in failing to scrutinize his operations and respond to alarms raised about them. ... SEC inspectors would have performed regular inspections of his securities brokerage operations as part of the agency's oversight program. SEC officials stress that it was Madoff's separate and secretive investment-adviser business that was used to perpetrate the alleged scheme, and that examinations of the securities operations wouldn't necessarily have detected irregularies. The hedge fund business didn't register with the SEC until September 2006. ... 'The agency can't help but look bad', said Barbara Roper, director of investor protection at the Consumer Federation of America. 'It does raise questions ... about the quality of the enforcement division generally'. ... A wrinkle in the case is the complaint dating back nine years by a securities industry executive named Harry Markopolos. He contacted the agency's Boston office in May 1999, telling SEC staff they should investigate Madoff because it was impossible for the kind of profit he was making to have been gained legally. The SEC's Boston office has been accused in the past of brushing off a whistleblower legitimate complaints, in a case that brought the resignation of the head of that unit in 2003", Marcy Gordon at the Houston Chronicle, 13 December 2008.

"The cops can't catch every crook, but a sophisticated financial system should be able to spot a multibillion-dollar Ponzi scheme operating in its midst. A failure by the authorities to catch [BM's] allegedly fraudulent activities could count as one of the biggest regulatory slip-ups of recent times. The [SEC], with substantial enforcement powers and a specific mandate to protect investors, received warnings about Mr. Madoff over several years. ... And if the agency did follow up on such leads and found nothing, the public should be told the details", Peter Eavis at the WSJ, 13 December 2008.

"An enforcement case 16 years ago gave the [SEC] its first shot at figuring out how [BM] could rack up such favorable returns with such uncanny consistency. After that, it received numerous warnings from outside whistle-blowers and at least twice looked into Mr. Madoff's brokerage itself. ... 'This is a debacle for the SEC,' said Joel Seligman, an SEC historian and president of the University of Rochester in New York. 'The commission has a lot to answer for'," Kara Scannell at the WSJ, 15 December 2008.

"The [SEC] will examine the relationship between a former official at the agency and a niece of Bernard L. Madoff [BLM], after the SEC's chief admitted, 'apparent multiple failures' to oversee the firm at the center of an alleged $50 billion Ponzi scheme. In an extraordinary admission that the SEC was aware of numerous red flags raised about [BLM] Investment Securities LLC, but failed to take them seriously enough, SEC Chairman Christopher Cox ordered a review of the agency's oversight of the New York securities-trading and investment management firm. ... Cox's statements represent a strong rebuke of an agency already facing criticism of its response to the credit crisis. Mr. Cox said an initial review of Mr. Madoff's firm found that 'credible and specific allegations' made as far back as 1999 'were repeatedly brought to the attention of the SEC staff, but were never recommended to the Commission for action.' ... Harry ... Markopolos pursued his accusations for years, dealing with the SEC's regional offices in New York and Boston, according to documents reviewed by the [WSJ]", Aaron Lucchetti, Kara Scannell and Amir Efrati at the WSJ, 17 December 2008.

"[SEC] investigators discovered in 2006 that [BM] had misled the agency about how he managed customer money, according to documents, yet the SEC missed an opportunity to unconver the Ponzi scheme. ... Under pressure to deliver, Mr. [Harry] Markopolos and a colleague at their Boston investment outfit tried to reconstruct Mr. Madoff's puported strategy. Their results paled in comparison, and Mr. Markopolos began suspecting possible fraud. ... Mr. Markopolos argued his case: A key part of Mr. Madoff's strategy relied on buying and selling options of the Standard & Poor's 100-stock index. But Mr. Markopolos said his research showed there weren't enough S&P-100 options in existence at the time to support Mr. Madoff's stated strategy, given all the money he seemed to be managing. So something else must be going on. ... In November 2005, Mr. Makopolos sent [Meaghan Cheung, a supervisor in the SEC's New York office] ... a series of 29 'red flags,' ranging from in-depth mathematical calculations that purported to show the Madoff investment stragtegy couldn't work, to little more than rumor or innuendo", my emphasis, Gregory Zuckerman and Kara Scannell at the WSJ, 18 Deecember 2008.

"Yet surely I'm not the only person to ask the obvious question: How different, really, is Madoff's tale from the story of the investment industry as a whole? The financial services industry has claimed an ever-growing share of the nation's income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it look as if much of the industry has been destroying value, not creating it. ... Last year, the average salary of employees in 'securities, commodity contracts and investments' was more than four times the average salary in the rest of the economy. ... But surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion. ... Well, Madoff allegedly skipped a few steps, simply stealing his clients' money rather than collecting big fees while exposing investors to risks they didn't understand. ... At the crudest level, Wall Street's ill-gotten gains corrupted and continue to corrupt politics, in a nice bipartisan way", my emphasis, Paul Krugman at the Houston Chronicle, 20 December 2008.

Barron's, 22 December 2008, reprinted in large part, a 7 May 2001 article, "Don't Ask, Don't Tell", about BM's operations. "What's more, these private accounts have produced compound annual returns of 15% for more than a decade. ... When Barron's asked Madoff how he accomplishes this, he says, 'It's a proprietary strategy. I can't go into it in detail'. ... Still, some on Wall Street remain skeptical about how Madoff achieves such stunning double-digit returns using options alone. Three options strategists for major investment banks told Barron's they couldn't understand how Madoff churns such numbers using this strategy".

"Markopolos's work was a roadmap for any team of competent investigators to expose the fraud. ... The revolving door there is the biggest problem: Many [SEC] staff regulators who are ambitious and competent quit to pursue jobs in the financial industry that pay multiple times their former government salaries. ... I heard the excuses about why cases that we, the examination staff, uncovered failed to warrant actions by the [SEC] enforcement staff. .. Too complicated. ... Too politically connected. ... It is time to rethink the structure of the regulatory system because what we have isn't working", Eric Bright letter to the WSJ, 23 December 2008.

"Instead of encouraging maximum disclosure and protecting investors, the SEC often aimed and fired at small guys and let the Madoffs of the world get a free pass. It would take 50,000 successful $1 million penny stock-scam prosecutions to equal the Madoff scam and that is just for starters", Mark Baum letter to the WSJ, 23 December 2008.

"Options traders say anyone who did a bit of homework on [BM's] 'proprietary trading strategy' could see it was unworkable given market conditions in 2008. ... 'All it took was simple math--"What's the open interest of the S&P 100 option, and how many trades does he say he's making?'" said Jow Kinahan, chief derivatives strategist at brokerage thinkorswin", Rob Curran at the WSJ, 24 December 2008.

The SEC staff is preoccupied with form-filling and looking for other employment.

Think, the SEC opened 671 cases in the year ended 30 September 2008, my 9 December 2008 post. So?

The SEC will never be called to answer for anything.

This is SEC business as usual, step on ants and let elephants dance.

Markopolos "audited" Madoff's books and the fools at the SEC didn't understand what he did.

Yes Mr. Krugman. If the profits were "an illusion", I ask, "Where were the CPAs"?

Until I read this Barron's article I was agnostic on CPA lability arising from audits of Madoff's "feeder funds". Now I believe they should pay through the nose. Do these CPAs audit other investment banks? Were there "red flags" to pursue? Who is kidding whom? Are the Big 87654 ready to be sent to the Gulag? Can they substantiate anything? These incompetents were on "inquiry notice" seven years ago. Plaintiffs' bar, good luck! Will the PCAOB investigate this? Or is it afraid of what it might find?

I agree with Bright.

Yes Mr. Baum.

The SEC can't do "simple math".

Krugman on the Economy

"Which decade is it, anyway? Not long ago it seemed as if everyone watching the carnage in financial markets was drawing scary parallels with the 1930s. ... You might think, then, that everyone would be congratulating Bernanke and company for their good work. But at an economic conference I recently attended, many of the participants--including people with a lot of influence in the policy world--seemed to be bashing the Bernanke Fed. ... The emerging conventional wisdom, if what I heard is any indication, is that Bernanke has been fighting the wrong enemy all along: inflation, not financial collapse, is the real threat. ... So this seems like a good time to declare that the new conventional wisdom is wrong. We are not watching a rerun of that '70's show--and the misguided belief that we are could do a lot of harm ... But as I said, this time there's no wage-price spiral in sight. ... But where are the unions demanding 11-percent-a-year wage increases? (Where are the unions, period?) Consumers are worried about inflation, but you have to search far and wide to find workers demanding compensation in the form of higher wages, let alone employers willing to accept those demands. In fact, wage growth actually seems to be slowing, thanks to the weakness of the job market. And since there isn't a wage-price spiral, we don't need higher interest rates to get inflation under control", Paul Krugman (PK) at the Houston Chronicle, 3 June 2008.

PK, are you serious? If you want to see your "wage-price" spiral, look at Asia, Vietnam, for example. I disagree with you, PK; we see a rerun of the 1970s, but this time, it will be worse for American workers as real wages in the US continue to fall to third world levels. You want to see unions, look to Asia; wage increases, look to Asia. PK, read a newspaper. As to increasing interest rates, why are commodity prices so high, if not in part due to low interest rates? See my 22 April 2008 post. PK, I think you understand what's going on, but are afraid to tell us.

Krugman on Oil

"'The Oil Bubble: Set to Burst?' That was the headline of an October 2004 article in National Review, which argued that oil prices, then $50 a barrel, would soon collapse. Ten months later, oil was selling for $70 a barrel. 'It's a huge bubble,' declared Steve Forbes, the publisher, who warned that the coming crash in oil prices would make the popping of the technology bubble 'look like a picnic.' ... So here are two questions: Are speculators mainly, or even largely, responsible for high oil prices? And if they aren't why have so many commentators insisted, year after year, that there's an oil bubbble? ... The only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding--an increase in private inventories of black gunk. This actually happened in the late 1970s, when the effects of disrupted Iranian supply were amplified by widespread panic stockpiling. But it hasn't happened this time. ... Traditionally, denunciations of speculators come from the left of the political spectrum. ... After all, a realistic view of what's happened over the past few years suggests that we're heading into an era of increasingly scare, costly oil. ... Again, I wouldn't be shocked if oil prices dip in the near future--although I also take seriously Goldman's recent warning that the price could go to $200. But let's drop all the talk about an oil bubble", Paul Krugman (PK) at the Houston Chronicle, 13 May 2008.

I agree with PK. The commentators are being misled because they think in terms of dollars as opposed to other currencies.

Krugman on Commodities

"Will limited supplies of natural resources pose an obstacle to future world economic growth? How you answer this question depends largely on what you believe is driving the rise in resource prices. Broadly speaking, there are three competing views. The first is that it's mainly speculation. ... The second view is that soaring resource prices do, in fact, have a basis in fundamentals. ... The third view is that the era of cheap resources is over for for good. There are some very smart people--not least, George Soros--who believe that we're in a commodities bubble. ... My problem with this view, however, is this: Where are the inventories? ... Inventories of food and metals are at or near historic lows, while oil inventories are only normal. ... Meanwhile, resources are getting harder to find. Big oil discoveries, in particular, have become few and far between, and in the last few years oil production from new sources have been barely enough to offset declining production from established sources. ... Suppose that we are really running up against global limits. What does it mean? ... But rich countries will face steady pressure on their economies from rising resource prices, making it harder to raise their standard of living", Paul Krugman (PK) at the Houston Chronicle, 23 April 2008.

I agree with PK, who writes, "I find myself somewhere between the second and third views". I see the first "view" as an empty statement. We always have speculation. So? There are always longs and shorts. Why suddenly did prices rise and are staying high? What changed in the last two years?

CDOs

Paul Krugman, Princeton Economics professor, and NYT columnist, hit the nail on the head today, in criticizing the rating agencies for the impending Collateralized Debt Obligation (CDO) disaster. He writes, "the bond-rating agencies, have gone along with the premise, telling investors that the synthetic assets created by CDOs are equivalent to high-quality corporate bonds".

The rating agencies, like the Big 4 CPA firms are part of the problem. As long as they are immune from malpractice lawsuits, they will say anything without fear of retribution. Congress should repeal the 1995 Litigation Reform Act and let the chips fall where they may.

By the way, former Treasury Secretary John Snow is trying to raise money for a Chrysler leveraged buyout. It's nice to see our former "public servants" doing so well.