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Thursday, February 25, 2010

Calling all ECU Economics is the Winter 2010 Department Newsletter if you have not yet received it!

If you have not received it, then please email our department secretary Cindy Mills at to put your email address on the distribution list. Please also provide your snail mail address too. Happy reading!

The Minneapolis Fed's new president's first speech...we are not out of the woods.

Minneapolis Fed's Kocherlakota Sees Slow Recovery The U.S. economy is on the road to recovery, but healing will be slow as the outlook for the labor market remains troubling, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said on Tuesday in his first public speech as a central banker.

Kocherlakota pointed to a "nascent" recovery that he believes will continue as the economy bounces back from the worst downturn since the Great Depression. He believes, however, that the recovery in gross domestic product, or GDP, and especially in unemployment, will be slow due to uncertainties surrounding various legislative initiatives and to ongoing problems in the banking sector.

"I do think that the economy is on the mend, and should continue to recover over the next two years in terms of both GDP and unemployment," Kocherlakota said, "but at slower rates than we would like."

Fueling his belief that the economy is healing is that real GDP began to grow again in the third quarter of 2009, with the growth rate accelerating to a seasonally adjusted annualized rate of 5.7% in the fourth quarter. He predicts that the National Bureau of Economic Research will declare the recession to have ended sometime in the second half of last year.

Kocherlakota was delivering prepared remarks about the economic outlook and the Fed's role as a bank supervisor before members of the Minnesota Bankers Association. The central banker said that with the challenges that still face the economy, he believes the economy will grow only by around a 3% per year rate over the next two years as opposed to 3.5%. In November, the minutes of the Fed meeting included a summary of central bank president and Fed governor forecasts for real GDP for 2010 and 2011; their predictions are roughly around 3% growth for 2010 and around 4% growth in 2011, an average of 3.5%.

Kocherlakota is more pessimistic about GDP for two reasons, he said: One, due to the great deal of uncertainty surrounding Congress' proposals for changes in health care and financial regulation; and two, because of the risk that the commercial real estate market poses.

Banks with large amounts of commercial real estate risk exposure "face a correspondingly elevated risk of failure," he said. "This threat could well lead to continued declines in bank lending, which would curtail the recovery." Even worse, banks' near-failure have strong incentives to make poor loans, he said. "This outcome would be even worse for the economy."

The central banker called the outlook for the labor market "not comforting." The jobless rate is currently at 9.7%. In the 25-year span between January 1984 and January 2009, unemployment never topped 8%, although it reached 10.8% in the autumn of 1982.

"Though unemployment has fallen somewhat, forecasts remain uniformly troubling," Kocherlakota said, adding that unemployment is notoriously slow to recover. He would be "highly surprised," he said, to see a sub-9% jobless rate by the end of 2010 or a sub-8% unemployment rate by the end of 2011.

The central banker was positive on inflation, noting that inflation has been relatively tame and the outlook is "basically promising." However, he noted, the excess reserves of over a trillion dollars held by deposit institutions create the potential for high inflation. The Fed, therefore, must take care with its policy moves to keep inflation at bay.

In other remarks, the central banker stressed the importance of the Fed maintaining its supervisory power, noting that a healthy economy requires a Fed that actively engages banks. Without that power, it would have been more difficult for the Fed to have employed the extraordinary policy measures it did over the last few years to stabilize the financial system, he said, such as the Term Auction Facility, which allowed depository institutions to bid on loans from the Federal Reserve.

Under the existing system, the Federal Reserve can turn to its own supervisors for detailed information about a financial institution to help it evaluate how to best help financial markets in the case of an upset. That ability needs to be preserved, he said.

"My conclusion is that stripping the Federal Reserve of its supervisory role would needlessly put a Great Depression on the menu of possibilities for our country," Kocherlakota said.

Kocherlakota became the twelfth president of the Minneapolis Fed on October 8, 2009. Before that he was a professor of economics at the University of Minnesota, where he chaired the economics department. He also served as a consultant to the Federal Reserve Bank of Minneapolis and from 1996 to 1998 he worked as a research staff member at the Minneapolis Fed.

Tuesday, February 23, 2010

Coming Soon! For ECU Economics Alumni and friends of the Economics Department only....ECU Economics T-shirts. You're gonna love them! Click on it!

This is why (among other reasons) promising to cap health care expenditures at 20% of GDP is fantasy.

The great Dr. Rothman alerted me regarding the hypothesis described below in the NY Times link regarding health care expenditures. If the "cost disease" is so, and I believe it is, then any future cost savings, it seems to me, will have to come from demand-side factors, namely, making healthy lifestyle choices and outcomes economically desirable with real monetary incentives that persuade peeps to stop cramming so much crap in their pie hole. All of the proposed health care legislation from the House does nothing but have the government pay for continued poor choices. Anyway one should not promise things they can not possibly deliver. Thus I have given up all hope to join the Chippendale dancers. But we should not promise to cap the percentage health care is of GDP if it suffers from the cost disease. Here's why...

Sunday, February 21, 2010

Jockey Fight!

You don't hear a lot about it, but the jockey's room at any race track across the country has been the site of some famous butt kicking incidences at one time or another. Imagine two 109 pound dudes whacking the hell out of each other in the jockey's room, out of the public eye. Ok, fine. Here we have it in full color on the track. All this goes on at 40 miles per hour on top of a 1200 pound animal.

Saturday, February 20, 2010

My dog ate my shoe.

No fooling. This is a picture of my wife's shoes. One is gone. Know where it went? In one of my dog's bellies. Apparently the rubber sole was a bit more than one of my canine daughters wanted.

Who needs spy novels when we have the Masoud? From our friends at STRATFOR

Friday, February 19, 2010

Political cover, nothing more, to increase your taxes.

Here is a link describing the UK value added tax, which economically is nothing more or less than a national sales tax. Check it out, it is 17.5% on the purchase of most all goods and services.

Then read this. History has shown since King Kong was a little bitty monkey that whatever the top marginal tax rate does, we only squeeze about 20% or so of GDP in tax revenues out of the economy. A VAT tax is the one remaining cash cow of jackpot proportions. Washington now drools over the chance to enact it and say "we had to...look at the deficit! This bipartisan commission said so!" And it is total and utter rot.


Saturday, February 13, 2010

Happy Birthday to me.

I turn 50 today. Gonna celebrate by playing the card at Gulfstream. Hope you have a great weekend!

The Greatest Horse Race Ever! April 9th at Oaklawn Park!

On the lower left is the undefeated Zenyatta who won last year's Breeders' Cup Classic. On the lower right is the greatest horse I have ever seen (don't really remember Secretariat all that well) Rachel Alexandra. They are set to meet in the Apple Blossom on April 9th at Oaklawn Park. In my mind this is the greatest race since War Admiral and Sea Biscuit. Man am I excited.

Oh yes, and at the top is my degenerate horse race gambling buddy Marshall Gramm with the great miler Cozzene. Nothing special in that picture. Just one great horse and one sorry jack ass.

Tuesday, February 9, 2010

Go ahead. Keep playing cops and robbers with terrorists. Watch what happens.

From our friends at STRATFOR

"This report is republished with permission of STRATFOR"
A Defensive Buildup in the Gulf
February 1, 2010

By George Friedman
This weekend’s newspapers were filled with stories about how the United States is providing ballistic missile defense (BMD) to four countries on the Arabian Peninsula. The New York Times carried a front-page story on the United States providing anti-missile defenses to Kuwait, the United Arab Emirates, Qatar and Oman, as well as stationing BMD-capable, Aegis-equipped warships in the Persian Gulf. Meanwhile, the front page of The Washington Post carried a story saying that “the Obama administration is quietly working with Saudi Arabia and other Persian Gulf allies to speed up arms sales and rapidly upgrade defenses for oil terminals and other key infrastructure in a bid to thwart future attacks by Iran, according to former and current U.S. and Middle Eastern government officials.”
Obviously, the work is no longer “quiet.” In fact, Washington has been publicly engaged in upgrading defensive systems in the area for some time. Central Command head Gen. David Petraeus recently said the four countries named by the Times were receiving BMD-capable Patriot Advanced Capability-3 (PAC-3) batteries, and at the end of October the United States carried out its largest-ever military exercises with Israel, known as Juniper Cobra.
More interesting than the stories themselves was the Obama administration’s decision to launch a major public relations campaign this weekend regarding these moves. And the most intriguing question out of all this is why the administration decided to call everyone’s attention to these defensive measures while not mentioning any offensive options.
The Iranian Nuclear Question
U.S. President Barack Obama spent little time on foreign policy in his Jan. 27 State of the Union message, though he did make a short, sharp reference to Iran. He promised a strong response to Tehran if it continued its present course; though this could have been pro forma, it seemed quite pointed. Early in his administration, Obama had said he would give the Iranians until the end of 2009 to change their policy on nuclear weapons development. But the end of 2009 came, and the Iranians continued their policy.
All along, Obama has focused on diplomacy on the Iran question. To be more precise, he has focused on bringing together a coalition prepared to impose “crippling sanctions” on the Iranians. The most crippling sanction would be stopping Iran’s gasoline imports, as Tehran imports about 35 percent of its gasoline. Such sanctions are now unlikely, as China has made clear that it is not prepared to participate — and that was before the most recent round of U.S. weapon sales to Taiwan. Similarly, while the Russians have indicated that their participation in sanctions is not completely out of the question, they also have made clear that time for sanctions is not near. We suspect that the Russian time frame for sanctions will keep getting pushed back.
Therefore, the diplomatic option appears to have dissolved. The Israelis have said they regard February as the decisive month for sanctions, which they have indicated is based on an agreement with the United States. While previous deadlines of various sorts regarding Iran have come and gone, there is really no room after February. If no progress is made on sanctions and no action follows, then the decision has been made by default that a nuclear-armed Iran is acceptable.
The Americans and the Israelis have somewhat different views of this based on different geopolitical realities. The Americans have seen a number of apparently extreme and dangerous countries develop nuclear weapons. The most important example was Maoist China. Mao Zedong had argued that a nuclear war was not particularly dangerous to China, as it could lose several hundred million people and still win the war. But once China developed nuclear weapons, the wild talk subsided and China behaved quite cautiously. From this experience, the United States developed a two-stage strategy.
First, the United States believed that while the spread of nuclear weapons is a danger, countries tend to be circumspect after acquiring nuclear weapons. Therefore, overreaction by United States to the acquisition of nuclear weapons by other countries is unnecessary and unwise.
Second, since the United States is a big country with widely dispersed population and a massive nuclear arsenal, a reckless country that launched some weapons at the United States would do minimal harm to the United States while the other country would face annihilation. And the United States has emphasized BMD to further mitigate — if not eliminate — the threat of such a limited strike to the United States.
Israel’s geography forces it to see things differently. Iranian President Mahmoud Ahmadinejad has said Israel should be wiped off the face of the Earth while simultaneously working to attain nuclear weapons. While the Americans take comfort in the view that the acquisition of nuclear weapons has a sobering effect on a new nuclear power, the Israelis don’t think the Chinese case necessarily can be generalized. Moreover, the United States is outside the range of the Iranians’ current ballistic missile arsenal while Israel is not. And a nuclear strike would have a particularly devastating effect on Israel. Unlike the United States, Israel is small country with a highly concentrated population. A strike with just one or two weapons could destroy Israel.
Therefore, Israel has a very different threshold for risk as far as Iran is concerned. For Israel, a nuclear strike from Iran is improbable, but would be catastrophic if it happened. For the United States, the risk of an Iranian strike is far more remote, and would be painful but not catastrophic if it happened. The two countries thus approach the situation very differently.
How close the Iranians are to having a deliverable nuclear weapon is, of course, a significant consideration in all this. Iran has not yet achieved a testable nuclear device. Logic tells us they are quite far from a deliverable nuclear weapon. But the ability to trust logic varies as the risk grows. The United States (and this is true for both the Bush and Obama administrations) has been much more willing to play for time than Israel can afford to be. For Israel, all intelligence must be read in the context of worst-case scenarios.
Diverging Interests and Grand Strategy
It is also important to remember that Israel is much less dependent on the United States than it was in 1973. Though U.S. aid to Israel continues, it is now a much smaller percentage of Israeli gross domestic product. Moreover, the threat of sudden conventional attack by Israel’s immediate neighbors has disappeared. Egypt is at peace with Israel, and in any case, its military is too weak to mount an attack. Jordan is effectively an Israeli ally. Only Syria is hostile, but it presents no conventional military threat. Israel previously has relied on guarantees that the United States would rush aid to Israel in the event of war. But it has been a generation since this has been a major consideration for Israel. In the minds of many, the Israeli-U.S. relationship is stuck in the past. Israel is not critical to American interests the way it was during the Cold War. And Israel does not need the United States the way it did during the Cold War. While there is intelligence cooperation in the struggle against jihadists, even here American and Israeli interests diverge.
And this means that the United States no longer has Israeli national security as an overriding consideration — and that the United States cannot compel Israel to pursue policies Israel regards as dangerous.
Given all of this, the Obama administration’s decision to launch a public relations campaign on defensive measures just before February makes perfect sense. If Iran develops a nuclear capability, a defensive capability might shift Iran’s calculus of the risks and rewards of the military option.
Assume, for example, that the Iranians decided to launch a nuclear missile at Israel or Iran’s Arab neighbors with which its relations are not the best. Iran would have only a handful of missiles, and perhaps just one. Launching that one missile only to have it shot down would represent the worst-case scenario for Iran. Tehran would have lost a valuable military asset, it would not have achieved its goal and it would have invited a devastating counterstrike. Anything the United States can do to increase the likelihood of an Iranian failure therefore decreases the likelihood that Iran would strike until they have more delivery systems and more fissile material for manufacturing more weapons.
The U.S. announcement of the defensive measures therefore has three audiences: Iran, Israel and the American public. Israel and Iran obviously know all about American efforts, meaning the key audience is the American public. The administration is trying to deflect American concerns about Iran generated both by reality and Israel by showing that effective steps are being taken.
There are two key weapon systems being deployed, the PAC-3 and the Aegis/Standard Missile-3 (SM-3). The original Patriot, primarily an anti-aircraft system, had a poor record — especially as a BMD system — during the first Gulf War. But that was almost 20 years ago. The new system is regarded as much more effective as a terminal-phase BMD system, such as the medium-range ballistic missiles (MRBMs) developed by Iran, and performed much more impressively in this role during the opening of Operation Iraqi Freedom in March 2003. In addition, Juniper Cobra served to further integrate a series of American and Israeli BMD interceptors and sensors, building a more redundant and layered system. This operation also included the SM-3, which is deployed aboard specially modified Aegis-equipped guided missile cruisers and destroyers. The SM-3 is one of the most successful BMD technologies currently in the field and successfully brought down a wayward U.S. spy satellite in 2008.
Nevertheless, a series of Iranian Shahab-3s is a different threat than a few Iraqi Scuds, and the PAC-3 and SM-3 have yet to be proven in combat against such MRBMs — something the Israelis are no doubt aware of. War planners must calculate the incalculable; that is what makes good generals pessimists.
The Obama administration does not want to mount an offensive action against Iran. Such an operation would not be a single strike like the 1981 Osirak attack in Iraq. Iran has multiple nuclear sites buried deep and surrounded by air defenses. And assessing the effectiveness of airstrikes would be a nightmare. Many days of combat at a minimum probably would be required, and like the effectiveness of defensive weapons systems, the quality of intelligence about which locations to hit cannot be known until after the battle.
A defensive posture therefore makes perfect sense for the United States. Washington can simply defend its allies, letting them absorb the risk and then the first strike before the United States counterstrikes rather than rely on its intelligence and offensive forces in a pre-emptive strike. This defensive posture on Iran fits American grand strategy, which is always to shift such risk to partners in exchange for technology and long-term guarantees.
The Arabian states can live with this, albeit nervously, since they are not the likely targets. But Israel finds its assigned role in U.S. grand strategy far more difficult to stomach. In the unlikely event that Iran actually does develop a weapon and does strike, Israel is the likely target. If the defensive measures do not convince Iran to abandon its program and if the Patriots allow a missile to leak through, Israel has a national catastrophe. It faces an unlikely event with unacceptable consequences.
Israel’s Options
It has options, although a long-range conventional airstrike against Iran is really not one of them. Carrying out a multiday or even multiweek air campaign with Israel’s available force is too likely to be insufficient and too likely to fail. Israel’s most effective option for taking out Iran’s nuclear activities is itself nuclear. Israel could strike Iran from submarines if it genuinely intended to stop Iran’s program.
The problem with this is that much of the Iranian nuclear program is sited near large cities, including Tehran. Depending on the nuclear weapons used and their precision, any Israeli strikes could thus turn into city-killers. Israel is not able to live in a region where nuclear weapons are used in counterpopulation strikes (regardless of the actual intent behind launching). Mounting such a strike could unravel the careful balance of power Israel has created and threaten relationships it needs. And while Israel may not be as dependent on the United States as it once was, it does not want the United States completely distancing itself from Israel, as Washington doubtless would after an Israeli nuclear strike.
The Israelis want Iran’s nuclear program destroyed, but they do not want to be the ones to try to do it. Only the United States has the force needed to carry out the strike conventionally. But like the Bush administration, the Obama administration is not confident in its ability to remove the Iranian program surgically. Washington is concerned that any air campaign would have an indeterminate outcome and would require extremely difficult ground operations to determine the strikes’ success or failure. Perhaps even more complicated is the U.S. ability to manage the consequences, such as a potential attempt by Iran to close the Strait of Hormuz and Iranian meddling in already extremely delicate situations in Iraq and Afghanistan. As Iran does not threaten the United States, the United States therefore is in no hurry to initiate combat. And so the United States has launched a public relations campaign about defensive measures, hoping to affect Iranian calculations while remaining content to let the game play itself out.
Israel’s option is to respond to the United States with its intent to go nuclear, something Washington does not want in a region where U.S. troops are fighting in countries on either side of Iran. Israel might calculate that its announcement would force the United States to pre-empt an Israeli nuclear strike with conventional strikes. But the American response to Israel cannot be predicted. It is therefore dangerous for a small regional power to try to corner a global power.
With the adoption of a defensive posture, we have now seen the U.S. response to the February deadline. This response closes off no U.S. options (the United States can always shift its strategy when intelligence indicates), it increases the Arabian Peninsula’s dependence on the United States, and it possibly causes Iran to recalculate its position. Israel, meanwhile, finds itself in a box, because the United States calculates that Israel will not chance a conventional strike and fears a nuclear strike on Iran as much as the United States does.
In the end, Obama has followed the Bush strategy on Iran — make vague threats, try to build a coalition, hold Israel off with vague promises, protect the Arabian Peninsula, and wait — to the letter. But along with this announcement, we would expect to begin to see a series of articles on the offensive deployment of U.S. forces, as good defensive posture requires a strong offensive option.

Saturday, February 6, 2010

An open letter from Saints fans to Miami...and it is for true!

Dear Miami,

The Saints are coming. And so are we, their loyal, long-suffering and
slightly discombobulated Super Bowl-bound fans.

While there's still time to prepare -- although a few hard-core Who Dats
will begin trickling in Monday, most of us won't arrive until Thursday or
Friday -- we thought we'd give you a heads-up about what you should

First things first: You need more beer.

Yeah, we know. You ordered extra. You think you have more than any group
of humans could possibly consume in one week. Trust us. You don't.

New Orleans was a drinking town long before the Saints drove us to drink.
But it turns out beer tastes better when you're winning. (Who knew?) So
let's just say we're thirsty for more than a championship; adjust your
stockpiles accordingly.

And look. When we ask you for a go-cup, be nice to us. We don't even know
what "open container law" means. Is that anything like "last call"?

It's Carnival season in New Orleans (that's Mardi Gras to you), and we'll
be taking the celebration on the road. So don't be startled if you walk
past us and we throw stuff at you; that's just our way of saying hello.

Oh, and sorry in advance about those beads we leave dangling from your
palm trees. We just can't help ourselves.

February is also crawfish season, and you can be sure that more than one
enterprising tailgater will figure out a way to transport a couple sacks
of live mudbugs and a boiling pot to Miami.

When the dude in the 'Who Dat' T-shirt asks if you want to suck da head
and pinch da tail, resist the urge to punch him. He's not propositioning
you. He's inviting you to dinner.

And if you see a big Cajun guy who looks exactly like an old Saints
quarterback walking around town in a dress ... don't ask. It's a long

We know that crowd control is a major concern for any Super Bowl host
city. Our advice? Put away the riot gear.

Reason No. 1: Indianapolis is going to lose, and their fans are way too
dull to start a riot.

Reason No. 2: New Orleans showed the world on Sunday that we know how to
throw a victory party. We don't burn cars. We dance on them.

Reason No. 3: Even if we did lose, which we won't, leaving the stadium
would be like leaving a funeral, and our typical response to that is to
have a parade.

Speaking of which: If you happen to see a brass band roll by, followed by
a line of folks waving their handkerchiefs, you're not supposed to just
stand there and watch. As our own Irma Thomas would say, get your
backfield in motion.

And hey, Mister DJ! Yes, we know you've already played that stupid Ying
Yang Twins song 10 times tonight, but indulge us just one more time.

To us, "Halftime (Stand Up and Get Crunk)" isn't just a song; it's 576
points of good memories. It's the sound of a Drew Brees touchdown pass to
Devery Henderson, a Pierre Thomas dive for first down on 4th-and-1, a
Garrett Hartley field goal sailing through the uprights in overtime.

It's what a championship sounds like. You may get sick of hearing it. We
won't. Encore, dammit.

Inside Sun Life Stadium, you may find your ears ringing more than usual.
We're louder than other fans. Seven thousand of ours sound like 70,000 of

Don't believe us? Ask the 12th man in the Vikings huddle.

Some people think it's just the Dome that heightens our volume. But
you're about to discover a little secret: We can scream loud enough to
make your head explode, indoors or out.

It's not the roof. It's the heart.

Well, OK, and the beer

Don't be surprised if there are more Saints fans outside the stadium than
inside. A lot of us are coming just to say we were part of history, even
if we can't witness it up close. The Saints are family to us, and you
know how it is with family: We want to be there for them, whether they
really need us or not. Because we know our presence will mean something
to them, whether they can see us or not.

Come to think of it, seeing as how you're taking us in for the week, we
pretty much regard you as family, too. So we're warning you now: If
you're within hugging distance, you're fair game..

Hugging strangers is a proud Who Dat tradition, right up there with
crying when we win.

Most sports fans cry when their teams lose. Not us. We've been losing
gracefully and with good humor for 43 years. Tragedy and disappointment
don't faze us. It's success that makes us go to pieces.

Hurricane Katrina? We got that under control. The Saints in the Super

So anyway, don't let the tears of joy freak you out. We're just ...

OK. Let's review:

Order more beer. Throw me something, mister. Suck da heads. Wear da
dress. Stand up. Get crunk. Hug it out. Protect your eardrums. Pass the
Kleenex. Hoist the trophy.

See you at the victory party.

Faithfully yours,

The Who Dat Nation

Thursday, February 4, 2010

R.I.P Keith Zambito

I regret to inform all ECU Alumni that Keith Zambito has passed away. As many of you know he was a torment to me as a student, but recently came back to the Department and was a great help in fund raising for our scholarships and in promoting the Alumni golf tournament. All was forgiven and the wayward son came home and was embraced and loved.

He will be missed.

Sorry but I have no picture of him.

Rest in peace.

Ric Mishkin talks...time to listen.

This really makes sense. Economic history sure helps explain things.

Must read: Cochrane and Hamilton

Monday, February 1, 2010

"The Camel Hump"

Here is the update of the monetary base from our friends at Cumberland Advisors. I have given it the affectionate name of "the camel hump." Check out all the mortgage backed securities the Federal Reserve has purchased. Oh baby. Now the jackpot you going to deflate it?