Risk management meets spin

It' always 'the same' and 'always different'.

The trick is figure out which is which.

Right now risk and solvency are linked. There are concerns, perhaps as never before that borrowers are not just 'too indebted' and could be forced to reschedule their debt in response not just to some future (unknown) shock but that even in a best case scenario we would see reschedulings for countries like Greece and Portugal and maybe Spain.

...and oddly the Germans are funding the so-called bailout fund that may be more painful to fall into than to miss.

Meanwhile Ireland took on a load of bank debt to save its banks but that bankrupted the whole country. Germany is playing like it is the nice guy in all of this when, in fact, if countries or banks defaulted the result would be swamp German banks with bad debt - and more than they could stand. Germany's bailout fund for Europe is a back-door bailout of German banks that allows German citizens to rail at financial excesses in other European nations instead of storming down the doors of their own banks!

What is so surprising these days is that today’s debtors seem to extract so few concessions from the Germans given the German plight.

Latin American borrowers played the Debt Card in the 1970-s and 1980s with much more aplomb.

As for other types of risk the main issues (to me) seem to be that for a while we thought we had quantitative systems to disperse risk that instead it turned out to concentrated it.

Risk management (identification) systems (like rating agency ratings) failed also

As a result risk today is not greater it is just more of an unknown and is thought to lurk in places where it should not be and that naturally changes the game.

When you are used to having a gun shoot only one way out of its barrel, then it shoots the other way on occasion, it makes the weapon more difficult to use even in your own defense.

Why we keep spinning our wheels

In economics there is always a lot that we do not know. But it is just as dangerous to ignore what you do not know as to let others know what little you do know. Doctors are good at this. We have some of the poorest nutritional guidelines and most doctors buy into them even though they are wrong. But doctors do not brook renegades. Being a doctor is about respect and you get that by staying in line. So in the science of nutrition we have a great stagnation but doctors who are giving bad advice on diet and exercise continue to be revered. Is that a better state of affairs than we have in economics? Maybe not with the except that most people are unaware of it..

In economics this problem of knowledge and credibility manifests itself in two ways. There are the arrogant ‘you’re wrong and I’m right’ economic presentations. And then there are the ne’er do well know-nothings that offer competing forecasts based on odd-ball contrarianism since, hey, even brainy economists don’t know it all- maybe they don’t even know enough (...to make themselves useful).

The lack of a real perceived wisdom in economics has manifested itself in another sort of perversion which is the politicization of economics. Economists have gotten to be like lawyers. They are in fact the expert witnesses of politicians. They are on one side or another and become the talking head du jour for the cause du jour of the politician du jour. Economists like politicians are divided into schools of thought. You know the conclusion of their research before you read their studies. Like politicians you know where economists stand on an issue, before they answer the policy question.

What this has led to is a lot of confusion. We need to get back to economics and to deal fairly with what we know Vs what we THINK WE KNOW and what we NEED to know.

For example, in my view all this warning about double dip in this recovery was very little about anything we knew. The misplaced worry has served to make the recovery weaker. Democrats, not appreciating the extent of the weakness, attacked the problem with half-effective stimulus program that favored spending that benefited its constituents. The President worsened matters by denying it was a recovery from the VERY FIRST DAY because he wanted to rub the Republican’s noses in ‘their’ recession. That kept people for shifting gears into an optimistic mode.

But on closer look it was the Democrat controlled banking committees that oversaw Fannie and Freddie and pushed them to lending standards that set this crisis in motion in the name of ‘broadening home ownership’. Ratings agencies that wanted fees more than than truth did not help. Banks that wanted their fees and played a treacherous game of hot potato with bad credits were another feature as were the clueless foreign investors. Fed Chairman Alan Greenspan contributed to the view that a house was a house and that even with all the new-fangled lending rules their future behavior and stable investment characteristics would remain the same –against all logic.

Wrapping a bow around and slapping a nice label on a septic tank does make it a nice gift for the one you love. Do not go there this Valentine’s Day. Yes we can find many failings to explain the crisis. But don’t excuse those who have opinions for fees on any level. Don’t think for one minute one party was responsible and the other was not. Don’t think that anyone has been focused on what to do to help the RECOVERY be the best possible. It has been about politics and factions and ideology.

Independent thought and opinion is very little sought out on Wall Street- I can attest to that in my own business. Investors want the current spin and to stick with it. The lesson of the last financial crisis is that there is safety in numbers and in size as well as in sophistication even when it isn’t at all safe at all. A good ‘bad business model’ is like a tumor with more tentacles than can be safely removed. The patient must learn to live with it until it becomes too debilitating. That is what derivative mortgage products were.

So if we now try turn our heads to the economy and what is wrong what do we find from the conventional wisdomists? To the extent that there is a consensus it is this: the economy is too slow. It won’t create jobs. We need more growth. Consumers have been sitting on their wallets and so on.

WRONG. Wrong. Wrong.

Here is a fact a FACT that will amaze you. There is a set of data on GDP that segments the economy into goods and services and structures; it does this for the whole economy not just consumer goods. If we take these data and covert them to indices in the various business cycles guess what we find?

Are you ready?

This recovery, yes this weak and feeble recovery, has produced the SECOND strongest PERCENTAGE increase in GDP-goods of any recovery from the 1960 recession’s recovery onward. Only the recovery from the 1981-82 recession was stronger for the goods sector. Yes, the goods sector in the 2007-2009 recession’s recovery has been better than the 1973-75 recession’s expansion. At the six quarter mark this recovery’s net output of goods lags behind the strongest recovery’s goods output by 17% but is ahead of the next best spending and output by 28%. This has been very impressively strong. GROWTH in spending and output HAS NOT BEEN THE PROBLEM. The problem has been the composition of spending and output.

While Republicans and Democrats chew at one another’s ankles like packs of rabid rats, the truth of the expansion and the economy has gone unheeded and the remedy unexplored.

The truth of the expansion and its disappointing nature is this: the expansion from the 2007-2009 recession has seen the greatest weakness in the services sector of any expansion since at least the 1960 recession. Services spending in the sixth quarter of the expansion is up by 1.3% compared to an average of 5% at this time of the expansion for previous cycles and a median gain of 4.6%. Even the two ‘weak’ recoveries from the 2001 and 1990 recessions posted service sector spending gains of 3.2% and 4.2% respectively at this same time of their respective cycles. What are we doing to kill off growth in our jobs producing sector? This question should be on everyone’s lips. It’s not just that we can’t create jobs but that we are killing growth in the sector that creates jobs best.

So the real question should be not why is spending so weak but why is spending on SERVICES so weak? Until we ask that question we will get nowhere. That is THE crucial question since that is the sector where the jobs are- and for now aren’t.

When you spend a dollar on goods its impact on the economy is deflected almost immediately. Economists call this a leakage. There is a leakage of income abroad because some of the goods you buy were made overseas so the payment to some of the factors of production geos to an overseas entity. Thus ‘leakage; out of the US spending stream diminishes the multiplier for domestic expenditure. Moreover, if you buy a good the proportion of the spending that stays here is more substantially due to the efforts of capital than to labor (in comparison with spending on services). There is less in the way of job creation when monies are spent on goods in place of services even looking just at domestic dollars spent. So if jobs are the issue you want monies spent on services where nearly 100 cents on the dollar spent stays here in the US and in a sector where productivity is lower. Lower productivity means that when you expand that sector you naturally create employment. That sector’s growth has been cut short in this cycle.

So that is the problem. Have either Republicans or Democrats offered solutions based on stimulating services-based businesses? NO. But since services business are land-bound the increased focus on property taxes and mandatory medical coverage (remember these are people intensive businesses) have hurt the services sector relatively more. A manufacturer can locate a plant overseas to avoid these costs or a firm can outsource some production but services cannot do this because they tend to be point-of-delivery operations.

I am against the FORM of this medical ‘reform.’ If heath care is important and if it is construed as a modern ‘right’ then it must be provided and paid for... But why saddle employers with that cost when employers use labor unequally? Doesn’t anyone recognize that when you tie costs to labor it makes labor relatively more expensive and firms will opt away from that added cost? This division in the growth between the two key economic sectors (goods VS services) is all the proof we need that making labor more expensive is a really crappy idea.

When we look at the role of healthcare ‘reform’ on labor costs remember that the program did not save us any money it will cost us money. It pushed more responsibilities on to businesses. Legislation should NOT be permitted to legislate its own cost estimates as this bill did and tie the hands of analysts at the CBO. There are some things we do know about economics and when we do our analysis we should reference those things rather than being prohibited from using them.

When we take on this idea of adversely impacting growth it opens a real can of worms. One added thing that may never be changed is the idea of taxing income. But let’s begin to challenge the idea that taxing income is good or even fair. In a study offered up in early 2009 the folly of income is clearly revealed (see links below).

These studies show that to live the life style of a $123,000-a-year middle class person in Manhattan you need only make $50,000 if you live in Houston Texas…Houston I think we have a problem, to quote Tom Hanks (in Apollo-13 out of context, of course)… or $63,400 if you are from Chicago (Mr Obama), or $72,772 if you are in Boston (Mr Frank)...even living in Queens NY cuts your cost to $85,918 compared to being in Manhattan.

If this is true what are graduated income taxes all about? The regional differences in the cost of living explain a great deal of the variation in incomes. So why treat a guy in Houston at $50K as struggling and guy in Manhattan at $125K as rich?

And what is rich?

Oddly, ‘rich’ is a stock concept and ‘income’ is a flow concept but to get at the rich someone decided to attack income. Interestingly many of the people who make high incomes this year are not the same as the ones who made it the last year. There is a great deal of turnover in the high income ranks- not the upper-upper tiers - but in the space between middle class and ‘THE Rich’ where ’affluence’ comes in varying shades of gray. That’s yet another reason not to tax high incomes. Let the poor guy who makes a high income for one year in five keep more of it.

There is also the need for tax reform for a lot of small businesses that are not incorporated and whose owners apply the individual tax rate. Their treatment should be different under the tax laws than that of the investment banker who is an employee and earns big bucks but who employs no labor. When you hike taxes on the small businessman that does directly go to his bottom line and affect his hiring decision. May of these small businessmen log incomes that count them as ‘rich’ when, in fact, they employ a lot of capital and labor in order to earn their pay.

On balance I hope I have used this space to OPEN SOME EYES. This is not about being a Republican or a Democrat. I dislike both parties. I have been a member of each of these parties at different times in the past. I think John Adams was right and we should not have used them. But now that we have THEY OWN US. The US political system is a duopoly (with some respect to the Tea Party) and it acts like it.

We need to look at what we have become and how this has affected what we are and our economy is. We need to look at it through the clear lens of analysis not from the perspective of a partisan. Banks that everyone claimed were responsible for the financial crisis have recovered first, have gotten the most government help and have restored their bonus pools to what they were in the days of olde. How can that be? Yet people still tell me it will be years before banks are willing to lend freely again because of all the damage done to them in the recession and financial crisis… how is that? Are those low interest rates just feeding banker bonus pools?

What have we created? Why is our political system so little for the people? Why are so many elected representatives millionaires? Why is there no clear analysis brought forth on what the problem is? Why to our elected officials go to Washington only so they can get elected again instead of to enact reforms? Why do we elect such gutless self-centered wonders that they will not look at the facts of an over generous unaffordable Social Security system and deal with how to make it solvent again?

It is not true that we ‘cannot solve our problems’. It is because our leaders will not face them that we do not even address them. They will not admit we have them because if they did they would have to fix them. And if they did than we, the electorate, would get angry and we would not re-elect them. So there it is. It all comes back to us and for whom we vote. And I don’t think it is as simple as elect a Democrat or elect and Republican or to dis-elect an incumbent. It’s much more complicated than that. And as voters we need to figure it out.

Soon.

End for now

New Fed voters- Do they matter?

Sometimes we make too much of the changing of the guard at the Fed. All Fed members are available and contribute to the discussion at all the meetings. But when it comes time to vote only the eligible voters have their say.

It is sometimes easier to be a vocal critic on the sidelines than to be a voter who must cast a public ballot. Moreover, when you know others may dissent that may make one a bit more reluctant to cast a vote in dissent because we know that having one dissenter is not an issue at the Fed but having more than one is much more so an issue. One dissent happens and can be written off to someone being eccentric, hard-headed or doctrinaire. But having two dissents is more of an issue, and hints at a schism. Having three dissents is an indication of severe divisions within the Fed. After all if three dissent how many more may had disagreed but not crossed that line? Were any other dissenters placated to not cross the line? Three is bad number. AND seeing three dissents this year is a possibility…not a certainty but it’s possible. Zero also is possible, but not likely.

Still, for all this talk about dissent and possible dissenters, there seems to be little chance that Bernanke will wind up voting as part of the minority any time soon. In a big picture sense there is a lot of worry about ‘nothing.’ A dissenting vote does not by itself do anything to the Fed or the Chairman’s ability to pursue the policy he desires... unless having a dissent or two …or more bothers him.

A dissenting vote may not even be a sign that the Fed is split in a way that impedes its ability to act. There are some functions that are reserved for the Board of Governors and are not for the FOMC. Since Bernanke has much more agreement and backing on the Board the potential for dissent, which comes mostly from new voting district bank presidents, does not have the same ability to disrupt Fed policy for those decisions that are relegated to the Board (for example, deciding to accept or reject discount rate change requests from the district banks – that is Board decision not an FOMC decision). Decisions at the Fed are by majority - period. The minority dissenting members on the FOMC get to issue separate statements about their dissent and sometimes that can be a bit ‘embarrassing’ but it does not impact policy directly.

The board members include two economists and four others with banking, legal, regulatory or Wall Street experience. Bernanke and Yellen are the economists. For the most part Yellen is identified with liberal causes and is expected to be a supportive of the Fed’s path for continued accommodation. The other board members are not monetary policy specialists and are unlikely to have strong views on the subtle macroeconomic arguments du jour. They are most likely to support the Chairman and his judgment.

Among the district bank presidents we have more economists and more with ideology. Bullard, Pianalto, Ronsengren and Hoenig cycle off the vote. Evans, Plosser, Fisher and Kocherlakota cycle on. All except Fisher are economists. Of the new voters Plosser and Evans are conservative and their economic views characterized as ‘monetarist.’ Fisher has a financial markets background and is less ideological in that sense but he is a ‘hard money’ guy. Kocherlakota has moved over from academics and had written or said things that sounded somewhat divisive with respect to the Fed’s current policy tact; but he has since has said rather pointedly that it is his desire to more or less fit in suggesting that he is not intending to make his point via hard-nosed ideology and dissent.

That raises another issue. Evans who taught at the U of Chicago is a clear conservative monetarist; nonetheless he took the most extreme ‘dove’ position on the Fed (not as a voter as he did not vote , but in his public speeches). He positioned himself to the ‘left of’ Bernanke calling for a raised inflation target ‘for a time’. I nonetheless label him a doctrinaire monetarist given his background. Yet, he found compelling evidence for the Fed to push for more accommodation. Indeed, Bullard who had voted in the last round, was in favor of using the Fed balance sheet as a policy instrument (surrogate monetary base measure) and to apply a sort of monetarist approach to tis size in a novel way. His idea would have provided protection on the upside if the economy began to perform. Bullard, also a monetarist, found a way to support the Chairman although he wanted somewhat more of a framework around policy than just an ongoing ‘easy money’ bent. Therefore as an assenting monetarist, Evans does not stand alone. His stance is unusual but so are the times. As a voter it is unlikely he will turn this view on dime- even on an inflated one. But he does have a framework that could change his vote if the economy were to shift gears fast enough and shift the risks. His stand comes from an ideology that interacts with his perception of the economy’s position – and the economy’s position can change.

Beyond the rhetoric of dissent, the real question is of Bernanke and how much consensus he will seek. One thing dissenters have is the ability to bargain a vote in dissent for some change in language in the Fed’s statement. If there are enough dissenters the Fed Chairman may prefer to try and alter the Fed’s language rather than to risk more ‘widespread’ dissent and the appearance of there being a schism which could cost the Fed ‘something’ in terms of market reaction to its polices.

For now Plosser and Fisher emerge as the most likely to take up the mantle of Hoenig as dissenter. Whether there is one dissent or more than one remains to be seen. If the risks in the economy shift to more growth and less inflation slippage Evans could be pulled out of the dove camp. But it will take some time for him to undergo that transformation. Kocherlakota will remain an enigma until we see how he settles in and if he can find a space of influence as part of the discussion. As we mentioned at the start all members are contributors to the discussion. But if the Chairman is interested in avoiding dissent he will have to listen more closely to those who vote than to those who do not. In the event that Kocherlakota’s views harden or that he thinks the committee is not taking his side of the argument to heart he is a potential candidate to go the way the way and to dissent eventually, though he does not come in with a chip on his shoulder.

More broadly it is the economy that will decide policy. There is already a good deal of debate on how quickly the Fed might actually shift gears. For the moment, Bernanke is full bore on completing the Fed’s Q-easing program. For that program to have full impact this is the right posture for him. But should the economy gain momentum, should job gains begin to look more solid, should the flirtation with deflation (really, with disinflation) take a turn the other way, various changes in view could be put into play.

We have a malleable Fed, at least at the district bank level. The Board seems to be more devoted to the Chairman with the possible exception of Yellen, although time will tell on that one. It would be ‘awkward’ for the chairman and vice-chair to disagree; we say it happen when Paul Volcker was Chairman but he eventually was dealt with a BOARD by the president himself that would disagree with him. Volcker had district bank presidents that supported him and that combination proved to be his undoing. Bernanke is on more solid ground with what seems to be full board support – at least for now.

I could see events beginning to shift votes or to harden dissents if policy did not shift quickly enough as the economy did. I still don’t’ see the economy or risks turning fast enough for the Chairman to lose the support of the Board. That is to me one of the least likely developments for 2011.

Bernanke remains in control. But how much dissent he gets and how he chooses to deal with it are still issues that remain clouded they are the exact pins on which the Fed’s actual policy pronouncements will turn.

Debit ceiling. help me from myself!

Bubble, bubble toil and shovel - The US has -when push has come to shove - shoveled money at its problems. When democrats and republicans are at loggerheads they come up with pile of cash and divide it between their respective interests and distribute it among their faithful followers and let the balance ride in the capital markets. So the US rolled tax cuts forward and it extended unemployment insurance WITHOUT any pledge to get its house in order in the future as 2010 came to close. There was no money to do this, of course, so it all comes out of the capital markets and now we have some oddballs who deign to call themselves conservatives arguing that they will hold the debt ceiling hike ‘hostage’ to some future pledge and action to curtail spending. Oh God, please save me from myself!

Stupid is what stupid does - You can’t do that with the debt ceiling. The plan for future fiscal reform is a good idea, one that is well overdue. Tying it to a debt ceiling hike is a disastrously bad idea. Debt ceiling legislation is STUPID. How does not paying our bills count as a conservative fiscal strategy?

Debt ceiling! The debt ceiling legislation is nothing but an opportunity for grandstanding; for those who have overspend to suddenly sound like they have religion, like a quit-smoker who would lecture current smokers then sneak out for a puff or two on the sly. Congress acts like somebody else agreed to all that spending that requires the ceiling to go up. No, one else agreed to it; Congress itself did it. Congress is acting like it’s bi-polar instead of in bi-partisan denial. You can’t spend then not agree to finance your efforts! Moreover, fooling with the debt ceiling is playing with fire. It is a juvenile act to try to threaten anyone with it. Such threats are the economic equivalent of threatening nuclear war. It’s the one threat you don’t dare follow through. Yet once it’s made it may get people to thinking and wondering… The electorate should take names and remember anyone that joins this movement to use the debt ceiling for political gain. Such people cannot be trusted to hold office.

Thinking about needed reforms... 2011

A new song by the 'Supremes'

My world is emptier because of you, babe...

Chief Justice John Roberts was critical of the partisan warfare that has slowed the appointment of federal judges to a crawl in the Chief Justice's annual report. Chief Justice Roberts writing in his year-end report Friday said that political gamesmanship on Capitol Hill has left some courts burdened with "extraordinary caseloads."

"Each political party has found it easy to turn on a dime from decrying to defending the blocking of judicial nominations, depending on their changing political fortunes," the chief justice wrote. He called on Congress and the president "to find a long-term solution to this recurring problem."

According to the WSJ, the Senate confirmed 19 judicial nominees in December, making a total of 62 since Mr. Obama took office, including Supreme Court Justices Sonia Sotomayor and Elena Kagan. At the same point in Mr. Bush's presidency, the Senate had confirmed 100 judicial nominees.

Not an isolated case: I will continue to point out that this partisanship is ruining the nation. each party has put its own goals ahead those of the responsibility of national stewardship that should take precedence for office-holders.

Below I shall argue that the electoral college and various state-level election requirements have concentrated political power in the hands of the two parties. With this concentration it has been made easier for large corporations to influence policy and harder for third parties to gain a toe hold. Moreover, it has emboldened the parties and their members because of their increased power. We need to take action to return the power to the people or these economic crises will become an enduring feature of a financial system that effectively controls those who supervise the regulators.

Third party efforts are futile - The best example in 'recent' years is Ross Perot. Perot once garnered 39% of the vote in the pre-election polls; eventually he amassed under 20% in the actual election as defectors from his cause probably realized the futility of the effort and chose to 'spend' their votes in ways that would 'matter.' Even with nearly 20% of the actual vote Perot accumulated zero electoral votes. Zero. Nearly twenty percent of the country voted for him and that desire was not reflected in balloting for the presidency. Perot finished a close second in electoral votes in two states. No one cried foul. It's no wonder in more recent times mayor of NYC Bloomberg pushed for term extensions in NYC to extend his stay in office there rather than mount the third-party push for the presidency some urged him to try. Earlier, Al Gore thought he was 'robbed' when he garnered the bulk of the popular vote and did not get elected president. By comparison Perot got nearly 20% and was shut out of the electoral vote-getting completely. Gore should have seen the handwriting on the wall. Gore lost a few percentage points, in the transition from 'popular' to 'electoral' Ross Perot loss one-fifth. One fifth? Hey I'll drink to that...

Partisanship Prevails - The step up in partisanship seems to go back to the view that Al Gore had the presidency stolen from him. Shortly after that election, although the press has not reported it widely, the Bush administration still was having many appointments blocked by democrats when the World Trade Center was destroyed. The White House was at that time operating with many unconfirmed functionaries in place because democrats had blocked their approval. Many of these were for administration officials with security responsibilities. Democrats still were holding up new appointees- not so much court appointees, but cabinet level and other appointees, out of anger over the election results. National security was compromised by partisan bickering. Did it contribute to the 9-11 security lapse? Well, it sure did not help tighten things up.

We should not assume that this sort of aggressive partisan behavior whether undertaken by republicans or democrats is not harmful to the nation. Nor should the old senatorial 'rights' be honored any more. Quite the opposite is true. Having an understaffed security operation and having an understaffed judicial system contribute to lowering the standard of justice, reducing the standard of living and providing a lessening degree security and of freedom for all. There are many other instances of this sort of perversion of our nation's interests performed in the name of partisanship. They include the blocking of Fed appointees ahead of the financial crisis so that the Fed was operating short-handed.

The electoral college flunks the test of time - In 2011 we should push to null and void the electoral college to reduce the strangle hold the two parties have on the country. With only two parties to appease, the two party system also is easier for corporate interests to meddle with in order to control economic outcomes. The electoral college promotes the consolidation of power in the two party system.

There are many reasons to seek to abolish the electoral college. But the college and its distance from democracy was an intended act enshrined in the Constitution itself. It seems to be part of an arrangement that took for granted the rivalries among the original 13-colonies and anticipated divisions lasting into nationhood requiring more experienced hands to choose the president and vice president. One would think with so much better information and with the greater modern emphasis on democracy in America the quaint and distrustful system could be converted to a true democratic effort. The electoral college system was meant to set up the election of officials to be decided in the House of Representatives in what was expected to be the likely event of an indecisive college vote. In doing that that it further entrenched the political parties that were formed and whose own rivalries eventually supplanted the rivalries among states.

John Adams decried the formation of political parties but they were embraced by his rival, the much revered Thomas Jefferson. Adams a patriot, a man of extraordinary character, and a wise man of the first order could see the entanglements from this sort of approach. Jefferson, for all his brilliance, seemed to enjoy the game of politicking more than he feared its backlash. The electoral college provisions subsequently adopted, dovetailed with the partisan approach to entrench the party-system's hold on power.

To wrap our democratic voting process in the mantel of the electoral college is to enshrine the two party system. It's a bit like taking perfectly good mortgages, splitting them into pieces then reissuing them as derivative securities- as though they still are the same things. Such a security may itself be made up of components that are sound but the way they are packaged together changes their properties enormously, as we now know. Similarly, our actual election of the president is not direct but is a derivative of a democratic process, and one that gets substantially subverted before the power of the vote is played out. This is much like in a derivative security. The rationale for the 'college' is based on a phenomenon that does not have much basis in the facts of the modern economy.

Two party system but no fun - In my short lifetime and limited experience (since I do not dabble in politics) I have been the direct victim of the various rules which entrench the two-party system - and so are many of you and perhaps you do not recognize it.

Growing up in Michigan, I became of voting age and assumed that Michigan's methodology for voting was the same as for the rest of the country. I found out in time that such is not true. The methods of voting are left to the states and are a states's rights issue- quite unfortunately. In Michigan I could vote during primary season, walk into the voting booth and vote in EITHER primary but just in one - no cherry-picking; no ticket splitting.

Once I moved to NY, I found that although my tax dollars still paid for the election bills, I was prohibited from the voting booth in the primary season unless I was a partisan. How about that? I pay for it but I am prohibited from using it UNLESS I am a registered something? That sharp slap in the face led me to become a registered voter for the first time in my life at about age 28. Since being in NY I have been a registered democrat and then a registered republican. I found both experiences quite distasteful. I have not been a registered anything for many years now and I am disenfranchised for it.

Why should I have to be register to vote in the primary? If the primary is 'owned' by the party, why doesn't it pay for its execution and planning? Why are public-owned spaces used as a venue? Why do the two parties hold primaries on the same day if these elections are private events?

Especially in this era of strained government finances we need to weed out practices that make no sense and drain the public coffers. Why is the public footing the bill for these partisan activities? Why doesn't the state sponsor elections for the plumber's unions and the UAW as well? Who else might the state want to- or be forced to - pick up the tab for it, even if elections are not open to all based on the current precedent of 'sponsoring' partisan elections?

Isn't this really just taxation without representation? It surely is.

Making the parties responsible for organizing and paying for their primaries makes sense, if THEY own the primaries. If they don't, precluding our participation is an obstruction of freedom and our right to vote. If you think about it, the original electoral college was made to select a president using various insiders instead of using the popular vote. The current system still has that wedge in it but with a stronger link to a democratic solution. Even so it imposes another road-block by making sure that only partisans in 'good standing' can vote to propose the candidates for the general election thereby limiting the choice of the masses to these pre-screened candidates.

However, if we view primaries as the nation's property and if the primary elections are open to all then we can justify paying for them.

Getting rid of the electoral college is a separate matter but with the same intent. The rules of that 'college' all but assure that one of two parties will control the national election. Getting rid of it would be another way to open up politics and reduce the grip of the two-parties that has become a cloying reality.

and...there seems to be less honesty, even when caught red-handed -- There is much less willingness to be a 'stand up guy' in the modern economy. With anonymity on the rise in economic transactions of all sorts and the spread of business on the internet, the credo of 'know your customer' has become less applicable. This is true in politics as well and in the dissemination of political funds. In the choice among doing what is ethical, what is legal or, what you can get away with, too often people are choosing what's behind door number three. This is yet another reason to get the political process back to a more open clear democratic foundation.

With increasing anonymity there is more and more opportunity to do things behind the cloak of door number three. So any action taken to undermine the political duopoly and to short circuit the potential for conspiratorial behavior that structure invites would be a step in the right direction.

Red flag for democracy - Getting the electoral college 'wedge' out of the political process would be a great thing. it could have a major impact on American politics. Maybe ten or twenty years ago this idea would not have seemed as compelling. But no longer can we look at the political system in the US and argue that it is justified by the results and the candidates that it produces. The results have not been good. The sheer volume of monies spent for election are a simple and straight forward red flag to honesty. Can anyone really believe that corporations 'donate' so much money to the political process and expect to get nothing in return? Are we supposed to suspend 'the laws of economics' for political analysis?

Once elected, politicians are far too prone to spending our money and running up the national debt. In the financial crises we saw how political objectives aimed at various constituencies fostered mis-guided policies then led to a bailout of the participating entities that had contributed mightily to the elections of members of the various financial committees in the House and Senate and beyond.

We can see European countries careening into a quagmire of debt. We do have the ability to change this for the US economy and to stop that from happening here. But collusion among the parties is easier with only two in the game; and the more they collude the more they spend. We can increase our choice among parties and complicate political bargaining by eliminating the strangle hold these two parties have under the current system. In part the argument here is for change and for restoring power to the people. The argument also is made to help illuminate the impact of the consolidation of power that occurs when your political system is a duopoly. We need to get people to think about the consequences that flow from our political system. The repeated financial crises we see are no accidents, no coincidences. Are we going to take responsibility or sit back and let it all happen again?

If anti-trust policies could be applied to politics these parties with their high concentration ratios would have been smashed under anti-trust laws long ago. If concentration is bad in economics, why is is it good in politics, where huge sums of monies are at stake? Why do government policies throw up barriers to entry in terms of the local voting requirements and electoral college selection process? Why are new political parties effectively blocked? Why is that tolerable?

These are points to consider as we enter 2011 and have a chance to think about a fresh start.

Let's work to abolish the electoral college as a start, and to reform election laws to increase participation and see where that leads us. We are badly in need of reform. At some point the lax enforcement of rules the poor regulation and the inability of the political system to control corporate America must be seen as a failing. How else can we view the inability to effectively regulate banks after all that went wrong in the financial crisis? If this is not failure of policies what is it? It is long overdue for us to remind our elected officials that they work for us and not the other way around. Parties, if they are to persevere, need to discipline their members for bad behavior or the legislative bodies themselves need to step it up. The role of monies in the election process is in need of a complete overhaul. The problems are many; they are linked to a clear erosion of values. Do we want to stop it?

EMU Ever-lasting Monetary System or not???

Europe's problems are not really about debt

‘OK’ is not necessarily ‘all-right’ - On the recent monthly numbers alone, the EMU is looking OK and maybe even like it is trying to right itself. But behind the scenes we know there are processes with long lags in operation undermining recovery. The markets are far from reassured. Ireland is a ticking time bomb. Spain and Portugal are trying to keep from being sucked into the debtors’ vortex. Some wonder about Italy-the country of the Treaty of Rome that began the move toward greater European integration. If Italy goes-all bets are off… or are they?

A brief history of which to be aware before you throw out the baby with the bathwater – The Treaty of Rome, signed in 1957, laid out a vision of a united Europe, it put the formation of the EEC in motion. The precursor to this plan had been launched in France with the initial ideas being promoted in 1950: the Iron and Steel Community. Its objectives were codified under the Treaty of Paris. Its objective was in part to keep French and German rivalry from boiling over by forming a more inclusive trading community. We see that same objective in the formation of the EU and of EMU in modern times. These plans to fuse Europe and diffuse rivalries have long-standing histories. Of course they were forged in different times with different fears in the fronts of peoples’ minds, not in the back or in some forgotten Alzheimer’s-ridden space. It is reasonable to ask if mere economic strains will break down what has been inexorable, if sometimes erratic and glacial, progress. This is a train that has been in motion for over 60-years in contrast to the relatively short life of EMU that many talk of when they speak of euro-unraveling and of a lack of commitment. Is there really a lack of commitment, or was EMU just poorly laid out? Was EMU just a bad idea that won’t work? Is it something to patched and fixed? Is it part of longer 60-year legacy with a real political will behind it that should not be short-changed despite its need to be fixed?

What are the REAL ties that bind Europe? When push comes to shove, is the geopolitical will in Europe stronger than the economic ties that bind? Is the real ‘will’ geopolitical or economic? That is the root question here. Economists that are forecasting the break-up of EMU see only the economic side and discount the political will.

The European legacy - In fact after the Iron and Steel Community was formed the Treaty of Rome’s EEC became the EC and then the EU and eventually EMU was formed out of part of the EU. Both EMU and EU stand today with the British in their familiar one-leg-in-and-one-leg-out stance. Italy is an important European and EMU nation with significant problems. But the train to European integration has been on a long ride. Will Italy, once the motivator of integration, send the Zone on a path toward disintegration? Can 60-years of progress be wrong? Is a ‘common currency’ just one ambitions step too-far for a people that 60-years ago dreamt of European integration? Is this all the farther it will go, or are they willing to go further to preserve their dream? To put another way, when Europeans dream, do they dream of being German, Italian, or French or of being European as it says on their passports? That will decide the fate of the EMU not Italy’s or Spain’s or Portugal’s debt problems.

As I said above, it’s not really about debt.

Clods and critics: Defending Bernanke

Get in with the in-crowd - More QE! really! The Fed missed. it never gets anything right! Aren't you tired of the same old criticism? I'll tell you one thing. The employment report for November was a real disappointment but bond prices FELL and STOCKs went UP after th release. markets acted as though it was good news. What that means for you is if you want to ride with a winner, it's time to get on the optimists' bandwagon and and off the pessimists bandwagon.

It is easy to be critical now. The Fed has lots of problems that it faces and few tools to attack them.

I found Bernanke's 60min performance about as good as one could expect.

It's complicated - As I am teaching Micro and Macro again at the Zicklin School of Business, I found Bernanke's comments on money quite illuminating. He is reminding us that the Fed NEVER prints money. And I'm not talking about the US mint either. The Fed provides markets with the raw material. Then banks use excess reserves to make loans; loan proceeds are deposited and the money creation process (money multiplier) is in gear. It is always in the hands of the banks. Always.

Putting the toothpaste back in the tube - Bernanke is trying to make the point that the massive injection of reserves is sitting there, just sitting there idle. When the Fed injects reserves it does TWO things (1) it pumps reserves into the banking market and (2) to accomplish that, it acquires assets. It is very complex to try and explain why the Fed is doing what it always does -and at the same time- why THIS TIME it thinks the cutting edge of policy different. This time it is the asset acquisition part of the operation not the reserve injection part. That is not the stuff for discourse on TV. Many economists do not seem to 'get' this. In any event, as long as banks sit on excess reserves, the Fed's reserve injections 'are not printing money'. They may be enabling the printing of money but since banks aren't doing it, how does enabling something that is not happening translate into doing it?

Since QE1 did not work banks have excess reserves on their books already.

Hand holding with the public- Bernanke is trying to reassure the public of two things: One, the Fed is not 'just' adding to that pile; it has another plan and, two, that all these reserves are not immediately inflationary. Until or unless they are lent they will not be an inflation factor. Banks hardly seem on the verge of doing' a 180' on lending. Hence his comment on money supply stands as correct.

Transitivity does not hold in economics or in football rankings- Michigan State University beat Wisconsin this year in football., Each team lost one game. yet it is Wisconsin is rated ahead of MSU. Because of that, Wisconsin gets to go to the Rose Bowl. How come if A>B then it is also true that A

Demand or supply? Money supply growth is picking up as the economy is picking up but that is not very well related to the enormous pile of excess reserves..Arguably the pick up is one of money demand not of supply.

Bernanke is trying to explain difficult, abstract, economic processes to a lay TV audience and I think he did a good a job with a complex subject.

Spokesperson not oracle - He is trying to bolster confidence which monetary policy needs to be effective. I think we can cut him some slack on being 'too certain'. Maybe saying that he is 100% certain that he can control this is not accurate... but can you imagine how everyone would have jumped down his throat had he used a number less than 100%.

Making policy effective - Getting support for his policies is a proper role for his public engagements. If you remember your early economics, it used to be call 'moral suasion.' Lying about policy effectiveness would not be right. But, here recognize that NY law allows businesses to 'boast' but not to engage in deceptive advertising.

Doesn't the Chairman get the same nuance?

Forget the facts it's Agenda City - I also think there is way too much negativism and that is what is hurting the economy. It is easy to be critical. There are different agendas here. Obama remained too negative far too long because he wanted to blame the Republicans for the economy and as a result he and the democrats did a worse job than they should have in promoting recovery. They paid in the polls. Wall Street wants QEII because it can make money off of it, whether it is a good idea or not. . Economists are afraid to stick their necks out on improved forecasts and bankers probably do not want a rosy outlook because they do not want to lend until the coast is clear. There are lots of agendas in the way of an 'objective' outlook.

Fearing Fear itself- All those economists fearful of the double dip did the economy a great disservice conjuring up risk when the economy did not dip again. Without all those fears don't you think the economy would have done better? I do.

Shame on all this negativism. Stop hiding under your bed.