January 16, 2014

Hispanics led the Housing Bubble, blacks did not

Here's a Urban Institute / Zillow study (via Kevin Drum) that confirms what lots of other evidence already suggested: that the Housing Bubble of 2003-2006 was led by over-inflated expectations about Hispanics. The yellow line above represents home values in Hispanic-plurality communities (not among Hispanics households themselves). All types of communities by largest racial group are indexed against their average residence price in 2000. By the time of George W. Bush's 2002 White House Conference on Increasing Minority Homeownership, Hispanic plurality communities are starting to take the lead in price gains and pull away through 2006, then drop catastrophically from 2007 to 2009.

A recent academic study of a big panel of households found that mortgage delinquency rates among Hispanics were 4.7 times the rate among whites by 2009.

The big run up in home prices was to a notable extent a Ponzi scheme based to a striking extent on the notion that there was a never-ending quantity and unimpeachable quality of people moving in from some south of the border, and that it would be racist to question whether they would be able to earn enough to pay back their mortgages or to make desirable enough neighborhoods to sell out to somebody else.

By the way, this graph explains in large part why Bush did moderately well with Hispanics in 2004, winning about 40% of their vote, while the equally pro-immigration McCain won only 31% in 2008: Bush's "Ownership Society" was intended in part to turn Hispanics into Republicans by making it easy for them to get loans to buy homes. Times were very good for Hispanics by November 2004, as the Housing Bubble put mortgages into their hands and provided lots of jobs in contructions, real estate, and mortgage selling. By November 2008, Hispanics had been hammered economically by the popping of the Hispanic Housing Bubble.

Of course, everybody else in the media seems to interpret the difference in Hispanic share between Bush and McCain as proving that the GOP needs to open the floodgates even wider.

As for blacks and the Housing Bubble, well, we hear a lot about "lenders of last resort." But, judging by this graph, black communities apparently served as borrowers of last resort.

Of course, this study [PDF] is oblivious to the obvious, and instead pounds the drums for more hair of the dog that bit us:
A House Divided: 
How Race Colors the Path to Homeownership 
Key Findings 
Fewer minorities apply for conventional mortgages. Although Hispanics and blacks make up 17 percent and 12 percent the U.S. population, respectively, they represented only 5 percent and 3 percent of the conventional mortgage application pool. 
Blacks experience the highest loan application denial rates. 1 in 4 blacks will be denied their conventional loan application, as opposed to 1 in 10 whites.
Wide disparities in homeownership rates among ethnic groups persist. 73.9 percent of whites own a home, whereas 60.9 percent of Asians, 50.9 percent of Hispanics, and 46.5 percent of blacks own. 
The rise and subsequent fall of home values in the U.S. housing bubble disproportionately affected black and Hispanic homeowners, measured by indexed home values between the peak of the market and the bottom, or “trough.” 
“It’s been more than 50 years since Dr. King fought for equality, yet it is apparent that the American dream of homeownership is not equally shared by all, even today. Our research shows that minority home buyers are encountering difficulties that often aren’t shared by white home buyers, and that even after they achieve the dream, they have been less likely to see a similar return on their investment."
Dr. Stan Humphries, Zillow Chief Economist

So, buckle up because influential people are starting to want to go for another ride on the Diversity Lending Rollercoaster.
 

Oscar nominees I've actually reviewed

Best Picture nominees:




"American Hustle"

"Gravity"

"Captain Phillips"

"Dallas Buyers Club"

"Philomena"

"The Wolf of Wall Street"

Glad to see Nebraska getting its share of the endless Oscar love for all things Alexander Payne.

My strong suit as a reviewer, however, is not telling you that good movies are good or bad movies are bad, but finding the ones that aren't quite what they seem to be.

For example, 12 Years a Slave could have been a very good movie by just adding one twist at the end. Remember how the guy comes home at the end from being kidnapped and apologizes to his family? It's a puzzling scene: why is he apologizing? Lots of deep explanations have been offered, but my guess is that the director had him apologize because the first 20 minutes of the movie were as phony as they looked: the weight of historical evidence suggests that Solomon Northup enslavement had started out with him as part of a con man ring playing the old skin game and something went wrong. What a kick in the gut to modern audiences it would have been with an ending in which Northup apologizes to his wife for trying to pull another con and getting caught. But, that would have been too disturbing and interesting for contemporary critics.

From what I've seen so far, I would probably vote for American Hustle. It's a thoroughly entertaining movie that seems like a respectable Interim Placeholder Best Picture until enough time has passed for us to actually figure out what really was the best movie. 

Gravity would be fine, too: my main complaint is that at 91 minutes it's too short, and thus stints on motivation, character development, and some explanations for the audience of Newton's Three Laws of Motion. The missing first act almost writes itself. But to say that you wish the movie were longer is not exactly a devastating criticism, whereas seemingly almost nobody would mind an Editor's Cut of Wolf of Wall Street.
   

January 15, 2014

Herbanism

Michael Wolf photo of Hong Kong
From Gizmodo
Tall is Good: How a Lack of Building Up is Keeping Our Cities Down
Urbanism -- Alissa Walker
Early in Spike Jonze's new film Her, Joaquin Phoenix's character gazes out his Los Angeles window. As the camera pans, we see not a squat, sprawling metropolis, but a golden-lit landscape of skyscrapers stretching all the way to the horizon. 
When I saw the film last Friday night, this scene made me gasp. 
It wasn't just the shock of seeing L.A. rendered as a vertical city. It was because this L.A. of the future looked like a place where I wanted to live. 
This digitally enhanced, metastasized Los Angeles—an L.A. that grew up instead of out—is almost a secondary character in the film. Jonze tapped graphic designer Geoff McFetridge and production designer K.K. Barrett, and also consulted with architect Elizabeth Diller on the look of L.A.'s future, which—for once—was blissfully free of those dystopian stereotypes. Even against the bleak narrative (no spoilers, don't worry!) the city around the characters is bustling, colorful, vibrant. It's a gorgeous world of tall buildings, mass transit, and busy sidewalks. 
Dare I say, this movie made density beautiful. 
Beautiful density is, of course, a reality for many cities; some of Her's most dramatic shots were filmed on the skyways and skyscrapers of Shanghai. But here in L.A.—like many cities that aren't Shanghai, or Tokyo, or New York—many people are doing everything in their power to suppress this future, citing detrimental side effects from building heights, whether it's shadows or earthquake danger. Even some already dense cities make it impossible to secure air rights, pass ridiculous parking restrictions, and work hard to incentivize low-rise development. 
But there is a huge problem looming larger than any skyscraper. Many major cities are experiencing a housing shortage which is pricing out large swaths of their populations—the workers, the creators, the young'uns. We need to start thinking big—or, rather, tall. 
In theory, most of us know density is good for us—it allows us to live closer together, share resources, save energy, and stay safe. But we like the idea of skyscrapers right up until the point where one is constructed next door. 
Suddenly, we lament that a tall building might obscure our view, or darken our perfect afternoon sunlight. There is an ongoing sentiment that density should be for someone else. I should be able to keep my car and my yard, while my neighbors get a subway and a public park. 
Anti-skyscraper urbanist Jane Jacobs argued for a "proper density," which it can be assumed looked a lot like the typical 1960s Greenwich Village street that she canonized through her writing.

Jane Jacobs liked her own neighborhood. Most people grow fond of where they live. I've liked every neighborhood I've lived in (except the one that had drug addicts shouting all night for their dealer Eddie to buzz them in so they could get their cocaine -- that started to get on my nerves). This is not to dismiss Jacobs, a wise woman, but urban planning mostly works by who it attracts and who it repels, not by the re-engineering of souls.
With this reasoning, we'd organize all the residential buildings into neat four-story walkups and go to work in the skyscrapers (an equation which obviously does not work out in today's cities). Jacobs was fearful of those towers sprouting throughout Manhattan at the time, which she believe took away a neighborhood's diversity and sense of community.

However, that doesn't seem to be the case. Hong Kong, which has more buildings over five hundred feet tall than any other city in the world, has been the muse of photographer Michael Wolf, who captures the towers as well as the people living inside them. These photos are shocking at first in their overwhelming scale. But 80 percent of the residents Wolf interviewed said they were happy, thanks to the sense of community. "The important lesson to be learned is that it's not space which is important for humans," Wolf told Atlantic Cities. "It's your neighbors."

Indeed. 

For example, in Chicago, Cabrini Green and Sandburg Village were modernist highrise complexes that were built about a mile apart at about the same time. The former was a public housing project that all the white residents soon fled, while Sandburg was a city-led for-profit project intended to drive out the Puerto Ricans from the neighborhood. It became a proto-yuppie haven. Cabrini Green is gone, but Sandburg Village is still there.

The unmentionable fear, of course, is running out of good neighbors. There are only so many to go around. And the American establishment has had as its policy for decades to make the population less white, more diverse. 

Obviously, immigration policy interacts in all sorts of ways with urbanism policy. America has been testing the diverse future out in ultra-immigrantish Los Angeles for a long time. (You might think that some lessons could be learned, but that'll never happen.) For example, the nice liberals of Beverly Hills have been resisting building the L.A. subway through Beverly Hills for the last 28 years. And if that mountain is finally climbed, the so-called Subway-to-the-Sea will still stop four miles from the sea because nobody has a clue how to get the People's Republic of Santa Monica to agree to a subway.

But you aren't supposed to think about that. Thus, in the movie Her, the population of Future Los Angeles has grown immensely, but almost all the characters are attractive white people.

In reality, Mexicans hate taking public transportation, hate high rises, hate driving Priuses. If they were suddenly renamed South Texans, the New York Times editorial board might even defy Carlos Slim and rethink this whole immigration amnesty project.

Armenian-type white immigrants like driving large expensive new cars really fast.

So, there are urbanist lessons to be learned from L.A.'s experience with immigration, but please don't mention them.

The other issues with high rises are traffic and that American white people don't breed in them. They are like zoo creatures -- to get them to reproduce, you need to take them out of small cages and put them in big enclosures. In Her, there is only one child and she lives in what appears to be the only single family home with a yard in Future Los Angeles.

L.A. subway map from Her
Also from Gizmodo:
One of the best moments in the new movie Her is watching Joaquin Phoenix ride an elevated train through a Los Angeles of the near-future, dance through a bustling subway station, and emerge at the edge of the Pacific Ocean. 
The scene got a surprised laugh from everyone at the screening I attended. After years of nimby battles and funding shortfalls, director Spike Jonze had just completed the Subway to the Sea!

Of course, it's the people who have upcoming movies screened for them who have done the most over the decades to keep the LA subway out of the liberal westside of LA. Funny how that works.

By the way, is this Google driverless car thing ever going to happen? If it does, who will take public transit then if you can sit in your own car and watch videos while Jamesbot drives you right to your destination? (Note, I'm not saying it's going to really happen.)
    

Heartiste on the bearable whiteness of "Her"

The late River (top)
and Joaquin Phoenix
Heartiste writes about the Oscar-contender Her, which is set in a future Los Angeles purged of anything offensive to advanced tastes:
Replying to a Steve Sailer review of the movie Her as a mischievous chain-yank of the exquisite sensibilities of white people who majored in humanities, commenter stari_momak pithily spits,
You notice how [as] America has gotten darker, white people have gotten fairer (or paler)? 
One consequence of the CH axiom Diversity + Proximity = War is, ironically, a racial self-segregation that belies the media message drumbeat propagandizing the opposite. Her is very much a SWPL (Stuff White People Like) utopia: clean urban spaces, softening pastels, car-less mass transit, bicycle lanes, love affairs with an advanced Siri AI who sounds like the whitest white girl who ever whited, a noticeable lack of bling or vibrancy. 
It’s almost as if the crushing weight of diversity (especially in LA) has freed upper middle class whites to wall themselves off in cultural compounds of their own making. Sure, they have to guss up their motives with doublespeak, but their actions — their revealed preference in economese — is strictly for a society of the whites, by the whites, for the whites.

Here are the names I recognize from the cast of "Her:"

Joaquin Phoenix -- the Spanish first name is due to his having been born in Puerto Rico where his American parents, John Bottom Amram and Arlyn Dunetz Jochebed, had gone as missionaries.
Amy Adams, Matt Letscher, Joaquin

Amy Adams -- Born at an American air force base in Italy, raised in Colorado, ex-Mormon.

Rooney Mara -- Catholic football princess of the Rooney (Steelers) and Mara (NY Giants) dynasties

Chris Pratt
 -- Born in Minnesota, and looks it. The phrase "corn-fed" comes to mind.

Olivia Wilde -- Daughter of one of the Cockburn journalists (making her some kind of distant niece of Evelyn Waugh). Her maternal grandfather was president of the San Francisco Golf Club. The USGA holds the U.S Open next door at the Olympic Club because SFGC doesn't want hoi polloi wandering its superb grounds.

Portia Doubleday -- She's probably not Gen. Abner Doubleday's direct descendant, but she looks like she could be.

Spike Jonze
Voice-only actors:

Scarlett Johansson
Kristen Wiig
Bill Hader
Brian Cox
Spike Jonze

In terms of diversity, Chris Pratt has an Asian-American girlfriend who is a lawyer and has a few lines. And there is an Asian waitress who serves Joaquin and Rooney in one scene. The worker at the next desk at BeautifulHandwrittenLetters.com is a black lady, but doesn't interact with anybody.

There is one child in the film. She's explained to be the daughter of some friends of Theodore Twombly, who aren't seen in the movie. She's blonde.

The extras in the crowd scenes are heavily Asian (some of the outdoor scenes were shot in Shanghai, some in downtown Los Angeles). Apparently, Asians have pushed Mexicans out of Future LA, which doesn't seem utterly implausible. Overall, though, Larry David's social circle is more diverse than the one in this sci-fi movie.
    

How precedents are set

Nine years ago, those two noted cosmopolitan universalists, Prime Minister Ariel Sharon and Finance Minister Bibi Netanyahu, decided that it was time to move beyond all this primitive nationalism and vulgar questions of "Whose side is this guy on, anyway?" and go out and find the technically most wizardly central banker out of all the billions of people in the entire world, who turned out to be Stanley Fischer. 

Now, President Obama has decided that for the role of eminence grise of the U.S. Federal Reserve Board, he should follow this precedent established by those famed proponents of national disinterestedness, Sharon and Netanyahu. Obama has put aside all these petty questions of national loyalty to look deep into the vast global pool of talent. And he has found his Own Personal Stanley Fischer, who -- like El Guapo in Three Amigos -- also happens to be The Actual Stanley Fischer:

January 14, 2014

Spike Jonze's "Her:" A Two-Hour Put-On?

Professional letter-writer Joaquin Phoenix's unique emotional insights are affirmed
by his manager Chris Pratt at the lovely offices of BeautifulHandwrittenLetters.com
From my movie review in Taki's Magazine of the classy little sci-fi film Her, which just won a Golden Globe for Best Screenplay:
But critics’ rapturous responses says more about how adroitly director Spike Jonze pushed their class marker buttons. For example, the normally intelligent Christopher Orr burbled in The Atlantic
Why Her Is the Best Film of the Year: Thoughtful, elegant, and moving, Spike Jonze’s film about a man in love with his operating system is a work of sincere and forceful humanism. 
One reason Her is so much less popular with viewers than with reviewers is because it is set in a future Los Angeles depicted as a serene, benevolent utopia stripped of everything that English majors have traditionally found tawdry about the real LA: swimming pools, movie stars, and fancy cars. Granted, those are the only things that the rest of the world likes about LA, but tasteful writers have always been irritated that Los Angeles was the Dream Destination of the Uncouth.
Thus, critic Liam Lacey explains in the Toronto Globe and Mail
Some things about this Los Angeles of the future are much better than today: Density has replaced sprawl, so everyone lives in high-rises looking out over other high-rises (many of the exteriors were shot in Shanghai), to the thrum of a trancey aural wash of Arcade Fire music. They walk on elevated walkways and ride a subway system and work in rooms in velvety pastels. Poverty and cars seem relics of the past. In Theodore’s underpopulated workplace, everyone is polite and supportive.

See photo above.

By the way, writer-director Spike Jonze is the co-creator of the Jackass franchise, and star Joaquin Phoenix made a hoax documentary about how he was quitting acting to become a rap star.

I don't know if I'm right that Jonze and Phoenix are pulling an expensive prank on the SWPL niche audience by making an intentionally dweeby movie, but Her is an awful lot funnier when viewed from that perspective.

Read the whole thing there.
      

Macroeconomic wizardry v. conflicts of interest

Dave Pinsen asks in the comments:
One question for you Steve, since you've implicated this clique in our ongoing economic malaise: given the constraints of the Fed (e.g., its dual mandate to promote economic growth and maximize employment, and its inability to address economic problems not associated with monetary policy, such as unchecked immigration, naive trade deals, poor fiscal policy, etc.), what would you have preferred it did differently over the last several years?

I don't talk about macroeconomics a lot anymore. I spent a fair amount of time in the 1970s and 1980s thinking about macroeconomics, but ultimately I didn't notice that I had a comparative advantage in that field. 

Perhaps when I was 21 my views on current macroeconomic policy were more correct than, say, Stanley Fischer's, who was 36 at the time (here's a long 2001 interview with Fischer on how his views have evolved toward the right), but if so, that would have been sheer blind luck on my part. (Fischer's disadvantage was that he started out as a child in the Habonim socialist-Zionist youth movement, spending six months at an impressionable age on a kibbutz in Israel, so he had a lot to unlearn.)

As the decades went by, I didn't notice that I had all that much to contribute to understanding macroeconomics.

So, today, I focus on simpler topics that don't attract much attention, such as conflicts of interest among the great and the good. The concept of conflict of interest is a very useful one, but one that the conflicted have largely lost interest in.

Dr. Fischer's career, for example, features a number of interesting conflicts of interest, but we are being told that those should be of no interest to us because he is the world's greatest macroeconomist, according to other great macroeconomists, who are his friends, students, bosses, and so forth. How do we know they are great macroeconomists? Because they are his bosses, students, and friends. The world's greatest macroeconomist wouldn't have friends, bosses, and students who aren't great macroeconomists, right?

I'm really not capable of assessing just how valuable Fischer's macroeconomic policymaking skills are, so perhaps that's why I am skeptical that they make up for his manifest conflicts of interest: I'm not smart enough to be confident that the macroeconomic magic that Dr. Fischer will conjure up will do us so so much good that his conflicts of interest are a negligible price to pay.

More importantly, exceptions rapidly become rules. 
   

Another "dual patriot"

The New York Times has a good op-ed by retired FBI man M.E. Bowman on another individual whose tireless "apologists portray him as a sort of dual patriot: loyal to the United States, but also motivated to help Israel."
  

"Stanley Fischer is the kindest, bravest, warmest, most wonderful human being I've ever known in my life."

As Adam Smith famously said, "It is not from the self-interest of the macroeconomist, the professor, or the central banker that we expect our economic policies, but from their benevolence."

But one economist once disagreed. It's informative to learn how economists as a whole responded to this insinuation at their national convention.

As I mentioned yesterday, an even more highly credentialed economist than Stanley Fischer, the Bates- and "Nobel"-winner Joseph Stiglitz, pointed out in 2002 that Fischer was richly rewarded by Citigroup immediately after spending seven years at the International Monetary Fund doing things Citigroup generally approved of.

(By the way, you can read the entire contract Fischer signed in 2001 with Robert Rubin and Sandy Weill here. There is no Smoking Gun, but it's just interesting to see the actual text of an incentive agreement among the Big Boys.)

"Incentives matter" and all that, right?

Not to economists, apparently. I found this old Brad DeLong post from 2003 that documents just how much economists hate the idea that anybody should ever imply that they might be self-interested:
January 13, 2003 
Joe Stiglitz is Losing His Argument 
Two of the things I learned at the American Economic Association meeting was that Joe Stiglitz is losing his argument over the desirability of international capital mobility, and why he is losing his argument. 
Now I think that Joe should lose the argument. ... But I will not deny that Joe has a strong case: financial panics, financial crises, irrational booms, irrational busts--economic catastrophe threatens the unskillful and the simply unlucky as they try to dance to the tune played by the far-from-rational financiers of New York and London. 
However, as I said, Joe is losing the argument. He is not losing the argument because rational debate shows that his is the worse cause (although I think that rational debate is likely to reach that conclusion). He is losing the argument because of something he wrote about former MIT Professor, then Principal Deputy Managing Director of the IMF, and current President of Citicorp (Group?) International Stanley Fischer: 
Moreover, the IMF's behavior should come as no surprise: it approached the problems from the perspectives and ideology of the financial community, and these naturally were closely (though not perfectly) aligned with its interests. As we have noted before, many of its key personnel came from the financial community, and many of its key personnel, having served these interests well, left to well-paying jobs in the financial community. Stan Fischer, the deputy managing director who played such a role in the episodes described in this book, went directly from the IMF to become a vice chairman at Citigroup, the vast financial firm that includes Citibank. A chairman of Citigroup (chairman of the Executive Committee) was Robert Rubin, who, as secretary of [the] Treasury, had had a central role in IMF policies. One could only ask, Was Fischer being richly rewarded for having faithfully executed what he was told to do? (pp. 207-208 of Globalization and Its Discontents) 
It is the sentence that I have highlighted in bold that was Stiglitz's complete and total disaster. I have met nobody who knows Stanley Fischer who believes that the answer to Stiglitz's question is, "Yes." Everybody I have met who knows Stanley Fischer sees Stiglitz's question as a knowingly-false and malevolently-intended act of slander. The implication that Fischer was rewarded for slanting IMF policy in a pro-Citigroup direction in return for a future fat private-sector paycheck is universally rejected as totally false. 
And as a result, every day at the AEA, it seemed that there were at least 300 friends of Stanley Fischer who woke up in the morning thinking, "I have to defend Stan against Joe." And they did so, quite effectively. 
Indeed, it is hard to know whether Stiglitz himself regards his question as anything more than an attempt at character assassination. For in the very next paragraph he explains that IMF policy is completely explained by other factors--that there is no need or room to resort to the personal venality of high IMF officials to understand why it did what it did: 
But one does not need to look for venality. The IMF... believed that capital market liberalization would lead to faster growth for the developing countries, believed it so strongly that it... gave little credence to any evidence that suggested otherwise.
In the two paragraphs I have quoted from Globalization and Its Discontents, Stiglitz engaged in the same rhetorical strategy that Mark Antony engages in in his "Friends, Romans, Countrymen" speech in Shakespeare's Julius Caesar. You raise a question ("Brutus hath said that Caesar was ambitious... [but] ambition should be made of sterner stuff" or "Was Fischer being richly rewarded for having faithfully executed what he was told to do?"). You then assert that the answer to the question is "No." ("Brutus is an honorable man" or "one does not need to look for venality"). But the possibility that the answer to the question is really "Yes" (or that the question is open) remains in the listeners' and readers' minds.

Okay, but Brutus and his friends who now ruled Rome had just stabbed Marc Antony's boss Julius Caesar to death. Marc Antony was trying to incite the crowd to avenge this murder while maintain plausible deniability to save his own skin in case it didn't work. Maybe America's economists would have thought it more seemly if nobody had ever mentioned the assassination again?
In this case, however, Stiglitz's rhetorical strategy has backfired disastrously.

Because Stiglitz wasn't addressing a bunch of nobodies, he was talking to the professional equivalent of the Roman senators.
This leaves me with mixed feelings. I think that the side of the debate that ought to win has won. I am too old and cynical to believe that the force of intellectual argument in some approximation to an ideal speech situation invariably carries the day. 
But this is really not how my particular branch of the human race's Long-Term Planning Group is supposed to work...

Seriously, the economists of America decided to interpret Stiglitz's point in the most obtuse, literal-minded fashion imaginable.

Of course Fischer didn't have a formal quid-pro-quo with Citigroup while he was at the IMF. But, surely, someone as astute as Fischer understood the incentive structure he faced in his post-IMF employment search? Did this have the slightest, perhaps unconscious influence upon his decision-making? No doubt he was totally sincere in his beliefs that doing the kinds of things that Citigroup approved of was in the best interests of ... well, of whomever it is that Fischer sees himself as part of. But, as Upton Sinclair might have said, "It is difficult to get a man to understand something, when his [future] salary depends on his not understanding it."

Now, let me reiterate that by all the accounts of other economists (except for Stiglitz) and of source-greasing journalists (except Grant F. Smith), Stanley Fischer is the kindest, bravest, warmest, most wonderful human being they've ever known in their lives. Sure, this whole Israeli government to American government transfer might strike yokels as a little dubious, but we're talking about Stanley Fischer here, not some mere mortal. The rules don't apply to people of the quality of Stanley Fischer.

Of course, once the Fischer Precedent is on the books, then it will be used to justify ... well, who knows what? But I'm sure we'll find out.
  

If you can't trust your witch doctor, who can you trust?

Arnold Kling, a macroeconomist with an MIT Ph.D., made some money on his own startup during the Internet years, which allows him to blog at his AskBlog with a politely jaundiced eye on his fellow MIT economics grads who are still running the world:
A few years ago, I happened to run into Olivier Blanchard. 

Blanchard is an MIT professor and longtime chairman of its economics department on leave to be chief economist at the IMF.
I offered my complaint that folks like Stan Fischer and himself had made macroeconomics narrow and stilted. “We’ve passed the market test,” he replied. 
But the “market test” to which he referred is limited to academic macro. It is a supplier-controlled cartel, not a consumer market.

In general, we still seem to be ruled by the guys who were on top of the world in the 1990s and early 2000s. It's often pointed out that virtually nobody on Wall Street went to jail after 2008, but it's also striking that plenty of economists who were in charge of setting up the system that proved so hollow in 2008 are still on top of the world. For example, Stanley Fischer's return to the U.S. is being greeted with hosannas as a nearly infallible genius because he happened to sit out 2008 as head central banker in Israel, with little mention of his role in setting up the global 2008 as the intellectual godfather of the dominant macroeconomists. 

A lot of this is just an old fear that any jungle tribesman would understand: Yes, maybe we occasionally have doubts that our most prestigious witch doctors know completely what they are doing, but surely they know far more than you or I, so we'd better keep paying them to keep the evil eye away.
   

In defense of the inbred clique running the world

At Marginal Revolution, economist Alex Tabarrok responds to my flurry of posts on who gets the top two posts at the U.S. Federal Reserve:
Inequality and the Masters of Money 
by Alex Tabarrok on January 14, 2014 at 7:22 am  
This post isn’t about inequality and money it’s about inequality and the masters of monetary policy. Consider Janet Yellen, her recent confirmation to chair the Fed has made her the most powerful woman in the world... Moreover, Yellen is married to Nobel prize winner George Akerlof. The fact that two such outstanding individuals should be married to one another is an illustration of assortative mating. Yellen-Akerlof are the 1% of the 1% and all that political and cultural achievement concentrated in one family is an example of the growth of inequality. Tellingly, one of the drivers of this inequality was greater equality of opportunity for women. 
Now consider, President Obama’s nomination for Fed vice-chairman, Stanley Fischer. Fischer was born in Zambia, holds dual Israeli-American citizenship and was most recently the governor of the Bank of Israel. In all of US history there is almost no precedent [link to me] for a former major official of a foreign country to become a major official of the United States. Given all the economists in the United States one might have thought that a suitable candidate could be found without this peculiar history and yet it’s not hard to understand why President Obama has nominated Fischer–to wit, I wouldn’t be surprised if everyone President Obama asked for advice on this question to told him that Fischer would be one of the best people in the entire world for the job. 
Indeed, many of the people Obama spoke to, including Ben Bernanke, would have been Fischer’s students, themselves a large subset of the tiny elite of the world’s top monetary economists. Perhaps the world of monetary economics is an inbred, clique, a supplier-controlled cartel [link to Arnold Kling]. Maybe so, but I see this as part of a larger story. Stanley Fischer, rather than thousands of other nearly equally-qualified people, is being nominated to the U.S. Federal Reserve for the same reasons that large firms, compete madly for a handful of CEO’s (in the process bidding up their wages to stratospheric levels). 
Consider that even in the rarefied world of monetary policy Fischer’s appointment isn’t unique. In 2012, the British appointed Mark Carney, a Canadian, to be the Governor of the Bank of England, the first non-Briton to ever hold the role. 
When even Great Britain and the United States find that their home-grown talent isn’t good enough that tells you that the demand for talent is immense. My favorite example of this from the business world is Sergio Marchionne. Marchionne is the CEO of Italy’s Fiat and the Chairman and CEO of Chrysler, among several other positions.
Small differences in quality at the top have a greater impact the larger the firm, the market, or the economy. How many truly great decisions did Bill Gates make at Microsoft (compared to another plausible CEO)? ... 
It’s also notable that the Federal Reserve is trying to create the highest-quality team.  ... 
The bottom line is this, a common set of factors is driving inequality: equality of opportunity,  assortative mating, O-ring production, increases in the demand for talent driven by the leveraging of talent through technology. The forces are similar and so are the results, the money elite, the monetary elite, the power elite.

So, while it may look to you like a set of friends and lovers has taken over the world through mutual backscratching, that just shows you aren't up to date on O-ring theory. When have O-rings ever failed the U.S.?
    

Stanley Fischer's nomination a Victory for Women

If you've been following the news lately, you'll know that one of the most important issues in the world, perhaps second only to transgender awareness, is The War on The War on Women. As you hopefully have been informed, men and women are two separate species locked in an endless zero sum war of attrition, so it's very, very important for society to focus on promoting women, and not get distracted by irrelevant details about precisely which women get promoted. The women getting the really good jobs aren't doing it for themselves, they're doing it to make the world better for all of us.

Stay focused, people.

For example, it was extremely important that Janet Yellen rather than Larry Summers get to be the Chairperson of the Federal Reserve Board because they come from such wildly different backgrounds: she was a girl and he was a boy. We're talking diversity. Similarly, if you've been paying attention to the news, you know that it's crucial that Sheryl Sandberg's Silicon Valley career thrive.

You go, girl!

From Fortune:
What Facebook's Sandberg shares with the Fed's next vice-chair 
By Patricia Sellers January 13, 2014: 11:38 AM ET 
Facebook exec David Fischer and his dad, Fed choice Stanley Fischer, are both well-suited to work for powerful women bosses. 
FORTUNE -- Sheryl Sandberg must be the most politically connected executive in Silicon Valley. 
There she was in Washington, D.C., last month when President Obama hosted a powwow with tech honchos at the White House. 
Fifteen years earlier, the Facebook (FB) COO served as chief of staff to Larry Summers when he was Treasury secretary in the Clinton administration. 
And last year, when Summers was being considered to chair the Federal Reserve, Sandberg leaned in to support him. 
Sandberg's mentor didn't get the Fed job—it went to Janet Yellen. But now it appears that Sandberg will have one degree of separation from the next No. 2 at the Fed. Obama's choice to be the Fed's next vice-chairman is Stanley Fischer, whose son David is Sandberg's longtime deputy. 
David Fischer is VP of Advertising and Global Operations at Facebook. Before Sandberg lured him to Facebook in 2010, he spent more than seven years working for her at Google (GOOG), helping her build a 4,000-employee ad operations group—and taking her job as VP of online sales and operations when she left. Famously thoughtful, calm and unflappable, Fischer first earned Sandberg's praise when he worked for her at Treasury. 
Like son, like father? Apparently. The elder Fischer, whom Sandberg indeed knows, is renowned as a low-key, low-ego, and evenhanded economist—the same rep that Yellen has. Once Ben Bernanke's thesis adviser at MIT, Stanley Fischer, 70, has been the World Bank's chief economist, the IMF's No. 2, a Citigroup (C) vice-chairman, and the head of the Bank of Israel, where he steered the central bank through the 2008 global economic crisis with remarkable finesse. 
That's such an impressive resume that some people doubted that Fischer would agree to be No. 2 at the Fed--but Yellen reportedly pushed the White House to ask him. If he's confirmed, Fischers father and son will be working for two of the most powerful women in the world.

And that's what really matters.

January 13, 2014

Haaretz: "Fischer won't discount post as Israel's next foreign minister"

From the Israeli newspaper Haaretz:
Fischer won't discount post as Israel's next foreign minister 
By Moti Bassok     Jan. 30, 2013

Stanley Fischer on Wednesday dismissed the idea that he would become finance minister, but did not discount a role in the Foreign Ministry.  
Outgoing Governor of the Bank of Israel Stanley Fischer has no intentions of leaving Israel - or its public life - and at a news conference on Wednesday, he said just that. 
“I will continue to be involved in the country’s public life. Israel is my second home and I’m not sure that it’s less than first,” Fischer, who announced Tuesday that he would resign from his post this coming June, said at the conference. 
Fischer rejected any suggestion that he would accept the post of finance minister in the next government but did not say he would turn down a chance to lead the Foreign Ministry. 
 
And there is also speculation in Israel that Fischer might take the mostly ceremonial position of President of Israel if 89-year-old Shimon Peres ever drops dead.

A man's got to keep his options open in life. This assumption that a 70-year-old high government official has to pick just one country and stick to it is so 20th Century.

Vice chairman of the U.S. Fed, foreign minister of Israel, head of the IMF, CEO of Citigroup, president of MIT, Dalai Lama, Pope, Ayatollah of Rocknrolla, head groundskeeper at Fenway Park, coach of the Boston Celtics, starting tight end for the Patriots (just until Gronk's healthy again, of course), astronaut, fireman, secret agent, who says one person can't do it all? And why not all at the same time?

What kind of monster are you to crush the dreams of a little boy?
       

"Incentives matter," except to economists

Economics teaches us, famously, that "incentives matter," that human behavior tends to respond to monetary signals from the marketplace. The most notable exceptions to this foundational discovery of the science of economics are, oddly enough, economists themselves, who wholly transcend such grubby earthly concerns. 

For example, economist Stanley Fischer, who is President Obama's nominee for vice chairman of the Fed, was the number two man at the International Monetary Fund from 1994-2001, a period in which he implemented policies that were very well received by the big banks of Wall Street. On December 20, 2001, Fischer signed a contract with Sandy Weill and Robert Rubin to become a vice chairman of Citigroup, with a minimum guaranteed compensation in 2002 of $2 million, plus other pleasant upside opportunities.

Obviously, there was no connection whatsoever between the two events: the insights of economics simply don't apply to economists. If you can't trust economists to not be swayed by economic incentives, who can you trust?

Yet, one deluded individual tried to call into question Fischer's disinterestedness. This hallucinatory person's name is Joseph Stiglitz. Granted, he has a few random professional credentials as an economist: former chairman of the president's Council of Economic Advisers, chief economist of the World Bank, winner of both the John Bates Clark Medal in 1979 and the quasi-Nobel Prize in economics in 2001. But, obviously, he was wrong to write on pp. 207-208 of his 2002 book Globalization and Its Discontents:
Moreover, the IMF's behavior should come as no surprise: it approached the problems from the perspectives and ideology of the financial community, and these naturally were closely (though not perfectly) aligned with its interests. As we have noted before, many of its key personnel came from the financial community, and many of its key personnel, having served these interests well, left to well-paying jobs in the financial community. Stan Fischer, the deputy managing director who played such a role in the episodes described in this book, went directly from the IMF to become a vice chairman at Citigroup, the vast financial firm that includes Citibank. A chairman of Citigroup (chairman of the Executive Committee) was Robert Rubin, who, as secretary of Treasury, had had a central role in IMF policies. One could only ask, Was Fischer being richly rewarded for having faithfully executed what he was told to do?

Fortunately, Stiglitz immediately went on to say:
But one does not need to look for venality. The IMF (or at least many of its senior officials and staff members) believed that capital market liberalization would lead to faster growth for the developing countries, believed it so strongly that it did not need to look at any evidence and gave little credence to any evidence that suggested otherwise.

Still, The Economist immediately jumped in to right this wrong in its review of Stiglitz's book:
In an extraordinary paragraph, the book all but accuses Stanley Fischer, the Fund's deputy managing director during the years in question, of corruption: he inflicted needless punishment on borrowing countries, Mr Stiglitz implies, in return for a nice fat job with Citibank, whose interests that policy served. The author himself knows this is rubbish. Mr Fischer—no less eminent an economist than Mr Stiglitz, by the way—is a man of (hitherto) unquestioned integrity, admired right across the profession. With assaults such as these, Mr Stiglitz only shreds his own credibility.

So there. Fischer is a man of unquestioned integrity so any questions about his integrity must be rendered unquestions.

The IMF's PR guy also objected to Stiglitz's slander of the purity of Fischer's motivations:
Stiglitz, the IMF and Globalization 
A Speech to the MIT Club of Washington
By Thomas C. Dawson
Director, External Relations Department
International Monetary Fund
17. As part of this score-settling, Stiglitz has made some very mean-spirited observations about Fund staff and officials, past and present. One charge in particular should not go unanswered, particularly before this audience. Stiglitz notes that Stanley Fischer, the former deputy head of the IMF and former MIT professor of economics, went straight from the IMF to Citigroup. Stiglitz adds: "A chairman of Citigroup was Robert Rubin who, as secretary of Treasury, had a central role in IMF policies. One could only ask, Was Fischer being richly rewarded for having faithfully executed what he was told to do?" To anyone who knows Fischer's utter devotion to institutions he works for, whether it was the IMF or MIT, the suggestion that he used twisted IMF policies to ensure a job at Citicorp is repugnant. Stiglitz surely knows that Fischer is regarded as a man of unimpeachable integrity and yet he cannot resist the jibe at him.

Fischer is a man of unimpeachable integrity so his integrity can't be impeached. 

QED.

Seriously, I don't doubt that Dr. Fischer is, relatively speaking, a fine fellow, well above average both in intelligence and morals for a Big Time economist / politician. After all, Fischer couldn't have gotten to be the intellectual godfather of the economists running the global economy for the last two decades if he didn't possess supple intelligence and interpersonal skills.

Hence it's only natural that these incredibly powerful people want to reward their friend and mentor, and crush the slightest skepticism about Fischer's right to work as a top policymaker for two separate countries in succession. Because if outsiders, or even other top economists like Stiglitz, are allowed to ask any questions about a great guy like Fischer, who knows what they could ask about the rest of our gang?  

WaPo: Everybody who is anybody loves Stanley Fischer

So if you don't love President Obama's nominee for vice chairman of the Fed, you're a nobody.

From the Washington Post:
Stanley Fischer saved Israel from the Great Recession. Now Janet Yellen wants him to help save the U.S. 
By Dylan Matthews, Updated: January 13 at 9:58 am 
Every August, central bankers from across the globe, who collectively pull the levers of the world economy, descend on Grand Teton National Park in Wyoming. They enjoy a symposium of big economic ideas and strenuous afternoon hikes. At one of their dinners a few years ago, Federal Reserve Chairman Ben S. Bernanke looked around at some fellow titans of finance. 
“Do you know what everyone at this table has in common?” he mused. “They all had Stan Fischer as their thesis adviser.” 

So, since the guys running the world economically have done such a great job of it in this century, promoting their aged mentor makes perfect sense.
Stanley Fischer, who Barack Obama nominated on Friday to be Janet Yellen's vice chairman of the Federal Reserve, is one of the most accomplished economists alive. Any one of his past jobs would be a crowning achievement in an economist’s career. 
As a professor at MIT — arguably the best economics department in the world — he helped found a school of economic thought that has come to dominate departments across the country. He also advised an all-star crew of grad students who went on top jobs in the policy world, including Bernanke, European Central Bank President Mario Draghi and former chief White House economist Greg Mankiw. 

Mankiw was George W. Bush's chairman of the Council of Economic Advisers. Heck of a job, Manky!
As the No. 2 official at the International Monetary Fund, he helped contain the Asian economic crisis of 1998.

Let's not talk about Fischer's sizable role in the Russian economic crisis of 1998.
As a vice chairman at Citigroup, he ran all work for public-sector clients at what was at the time the world’s largest bank.

Let's not talk about Citigroup's role in the Great Financial Crash of 2008.
And in 2005, Israeli Prime Minister Ariel Sharon and Finance Minister Benjamin Netanyahu picked him to lead the central bank of a country he had previously only visited.

Ariel Sharon and Bibi Netanyahu: two pure meritocrats without a biased, nationalistic, ethnocentric bone in their bodies. They would have picked Fischer for the job even if he were a Palestinian.
No matter — Fischer’s results were more than enough to assuage any doubts. No Western country weathered the 2008-09 financial crisis better. ... 
It’s fair to say he’s been embraced by the Israelis. Upon his resignation as governor of the Bank of Israel, Meirav Arlosoroff of the liberal daily Haaretz newspaper wrote that he is a “leader in whom the Israeli public had absolute trust” who “stood amid all the financial and leadership chaos like a fortress of stability, logic, level-headed judgment and international reputation.” Both Netanyahu and opposition leader Shelly Yachimovich lavished him with praise. 
Netanyahu reportedly attempted to keep Fischer in Israel by offering him the finance ministry. 

That Netanyahu, he's the ultimate believer in Open Borders cosmopolitanism.
But rather than enter politics, Fischer returned to America, joining the Council on Foreign Relations as a senior fellow in September.

A "decent interval" between his two jobs ... Nobody can say Obama is appointing Israel's central banker; they have to say he is appointing a former central banker for Israel. That could have been decades ago, right? You might almost think that Fischer's decision to resign early from his Israeli job was because he was tipped off about getting the American job, but that would be a conspiracy theory, so it's wrong. To posit a conspiracy theory, you'd have to believe that Stanley Fischer, Ben Bernanke, Janet Yellen, and Larry Summers are all friends.
He retained his American citizenship while in Israel, and spent his entire adult life here up until his move to Israel. He was a candidate to lead the Federal Reserve Bank of New York in 2003 (Timothy F. Geithner got the job instead), and the failure of his 2011 bid to run the IMF was attributed in many circles to his being “too American” for a job traditionally reserved for a European.
Fischer was widely considered a dark horse contender to succeed Bernanke, though his chances were always lower than those of Janet Yellen or Larry Summers (who Fischer hired as a professor at M.I.T.). Yellen's decision to pick him as her deputy surprised observers not because of Fischer's time abroad but because he is, if anything, overqualified for the no. 2 position. 
The market for top central bankers is increasingly global, most vividly illustrated by former Bank of Canada governor Mark Carney's appointment to lead the Bank of England.

The Carney Precedent justifies the Fischer Precedent. What will the Fischer Precedent be used to justify? I mean, shouldn't the CIA look to the global pool of talent? Who has more talent than Mossad? Or what about the NSA? Why should its leadership be restricted to Americans when the leaders of Israel's Section 8200 may well know more about certain software code embedded in NSA processes than NSA's current leadership?

You know, with that world-historical lane closure crisis deflating Chris Christie's chances in 2016, the GOP should think a little more imaginatively about its next presidential nominee. I know an MIT grad with plenty of high level experience who seems to be getting bored with just pushing the Pals around. Bibi 2016!
In this post-crisis era, the job of a central banker requires someone who is simultaneously a brilliant economist, regulator, diplomat and politician. There are few figures today who fill those roles as successfully as Fischer.

Just ask various Russian billionaires currently residing in London and New York.
Astride the divide 
America is Fischer’s adopted homeland: He was born in Mazabuka, a medium-size town in Northern Rhodesia, now Zambia. At 13 he moved to Southern Rhodesia (now Zimbabwe), where he stayed until heading to the London School of Economics.
He went to MIT for his doctorate, banging out a PhD in three years and then landing an assistant professorship at the University of Chicago. When Fischer arrived in Hyde Park in 1969, a chasm was about to open between Chicago, along with its peers near the Great Lakes — schools like Carnegie Mellon University and the University of Minnesota — and coastal powerhouses such as the University of California at Berkeley, Harvard, and, perhaps most notably, MIT. ...
Fischer was one of the few figures at the time with bona fides on each side of the argument. He was at Chicago when Lucas formulated his critique, but had MIT’s Samuelson on his dissertation committee, and in 1972 returned to that department as a professor. Perhaps as a consequence, his students remember him as an unusually diplomatic presence during the decade’s theory wars. ...
The fruit of Fischer’s effort to integrate the two approaches is known today as “New Keynesian” economics. It is the dominant approach in most leading economics departments, with Mankiw, Bernanke, IMF chief economist Olivier Blanchard and many others contributing to the movement. 
... Fischer also retained respect for his old Chicago colleague Milton Friedman, who shared some of Lucas’s ideas. ... 
The man [Bernanke] who would spend his Fed chairmanship flooding the economy with dollars to try to prevent a second Great Depression first learned how to do it from Friedman and Schwartz. And he learned about Friedman and Schwartz from Fischer. 
People don’t give up tenured spots in the MIT economics department. It’s one thing to take a few years’ sabbatical to take a policy job, as Fischer did from 1988 to 1990 when he served as the World Bank’s chief economist. But it’s quite another to resign such a post permanently, as Fischer did in 1994 when he joined the IMF as its second-in-command. 
He was recruited by Summers, who had gotten his first academic job at MIT on Fischer’s recommendation, and who was at that point undersecretary of Treasury for international affairs....
Fischer’s seven-year tenure, ending in 2001, came at a particularly rocky time for the IMF. The “structural adjustment” programs of tax increases and budget cuts it had recommended to developing countries had led to a political backlash, and anti-globalization activists began to regularly protest its meetings. Colleagues remember Fischer as a believer in IMF policies, but one who took critics’ voices into account. 
“When he interacts with you, he starts with the assumption that he can learn a lot from you,” said Mohammed El-Erian, who leads the bond fund PIMCO and served at the IMF with Fischer. “He doesn’t intimidate you with his brilliance, he engages you with his brilliance.”... 
Fischer left the IMF in late 2001, and some months later joined Citigroup in New York as a vice president. Three years into that role, in 2005, he was offered the post of governor of the Bank of Israel. At the time, Israel’s central bank was highly centralized, with the governor having near-absolute power to pursue whatever policy course he wished. Fischer accepted. Though he did not relinquish the U.S. citizenship he had held since 1976, he became an Israeli citizen upon arrival, in accordance with the law of return for non-Israeli Jews. 
It was not, however, Fischer’s first time living in Israel. He had taken frequent vacations and sabbaticals to the country with his wife, Rhoda, throughout his academic career. Nor was it his first time providing it with academic expertise. In the mid-1980s, when he was at MIT, he advised the Israeli government on how to extricate itself from its inflation crisis. Later that decade, he — along with Anna Karasik, Leonard Hausman and the Nobel laureate Thomas Schelling — was part of a project attempting to put together economic solutions to the Israel-Palestine conflict. 
That culminated in a book, “Securing Peace in the Middle East,” in which Israeli and Palestinian economists, representing their governments, agreed on a plan to eliminate restrictions on Palestinian employment in Israel, to transfer of control over Gaza and the West Bank to the Palestinians, and to implement a system of free trade in the region. 
The recommendations closely resembled the eventual form of the Oslo peace agreement between Israel and Palestine. ...

You can just tell how even-handed Fischer was by how much he was hated by Sharon and Netanyahu. Oh, wait ...
Hausman remembers Fischer mostly as a fiercely competent and easy-to-work-with project leader, but identifies a passion for the subject as well. “Israel, I think, always was a big part of his heart and mind,” Hausman said. “But also, Stanley was and is a big believer in Israeli-Palestinian and Israeli-Arab peace on reasonable terms.” 
Fischer remembers the process fondly. “I had never worked with Palestinians before,” he said. “I learned that if you want to work well with people with whom you disagree, it’s important to frame problems as merely technical ones.”

So, listen up, dummies: Fischer's jobs in Israel and now in America are merely technical ones. You shouldn't be asking lowbrow political questions like: "Whose side is this guy on?"
The Israeli economy that Fischer took over in 2005 was a world apart from the one he advocated in the early ’90s. The security wall meant that West Bank residents could no longer work in Israel with any ease. Since 2008, Gaza has been cut off from not just the Israeli economy but also from the world. Nevertheless, Fischer has retained his popularity among Arab colleagues. Hausman points out that Arab countries were a major base of support for Fischer’s unsuccessful 2011 bid to lead the IMF — rather remarkable for an Israeli candidate. 
Being governor of a small country’s central bank during a worldwide financial crisis isn’t anyone’s idea of a fun job. Israel, like many other nations, was hit with the consequences of screw-ups made on Wall Street and in Washington. U.S. policymakers could have, in theory, prevented the crisis; at his post in Israel, Fischer had no such ability. But Fischer had a weapon of his own: the shekel. 
Central banks generally have a lot of control over how much their countries’ currencies are worth relative to others. And reducing a currency’s value increases a country’s exports, which can often lead to economic growth. 
Big central banks tend to be cautious about using that lever. If Bernanke halved the value of the dollar relative to, say, the Chinese yuan, that would dramatically increase U.S. exports and probably economic growth, too, but it would also wreak havoc with the global financial system. Every dollar-denominated asset in the world, including all manner of bonds, would plummet in value. 
It’s less risky for small countries. There aren’t massive piles of shekels lying around in other countries the way there are with dollars and euros, and Fischer took advantage of that fact. On May 30, 2008, a dollar was worth about 3.2 shekels. On March 6, 2009, it was worth 4.2 shekels. In less than a year, Fischer had reduced the value of the shekel by about 25 percent — a massive devaluation. 
It worked. Exports soared, and 2008’s trade deficit of $2 billion became 2009’s trade surplus of $5 billion. While other countries fell deeper into recession, Israel brushed its shoulders off. 
When the White House first considered appointing Fischer as Yellen's deputy, the idea was dismissed as implausible. Not because Fischer was too controversial, that is, but because officials didn't think he'd be willing to take it. 
But after discarding the idea, Obama's aides were surprised to get a call from Yellen, who, reports Bloomberg's Julianna Goldman, told them, "not only did she want Fischer at the Fed, she had already reached out to him and sold him on the idea." ...
Fischer's views on financial regulation are harder to gauge. ... 
The role will likely be the last for Fischer, who at age 69 [actually, 70] is three year's Yellen's senior, and its significance is well summed up by Yellen's runner-up, Summers. Speaking at an IMF forum in Fischer's honor, Summers declared, "The number that is in my mind is a number that I would guess is entirely unfamiliar to most of the people in this room, but is familiar to all of the people on this stage, and that is 14.462. That is the course number that Stan Fischer's course in monetary economics at MIT for graduate students was. It was an important part of why I chose to spend my life as I have -- as a macroeconomist -- and I strongly suspect that the same is true for Olivier [Blanchard], and for Ben [Bernanke, and for Ken [Rogoff]. 

So, if you've loved the economic performance of America and the world in the 2000s, you've just got to love Stanley, according to the people who have been running things so brilliantly.

Study: Arizona's law against illegal immigration worked

The rage of the New York Times, which is about 8% owned by its 2008 financial savior / telecom monopolist Carlos Slim (who profits exorbitantly from phone calls by illegal immigrants home to Mexico), against the state of Arizona turns out to be empirically based: Arizona citizens had been effectively organizing to resist illegal immigration through rule of law:
Review of Economics and Statistics

Did the 2007 Legal Arizona Workers Act Reduce the State's Unauthorized Immigrant Population? 
Sarah Bohn
Public Policy Institute of California 
Magnus Lofstrom
Public Policy Institute of California and IZA 
Steven Raphael
Goldman School of Public Policy University of California, Berkeley and IZA

Abstract 
We test for an effect of Arizona's 2007 Legal Arizona Workers Act (LAWA) on the proportion of the state population characterized as non-citizen Hispanic. We use the synthetic control method to select a group of states against which the population trends of Arizona can be compared. We document a notable and statistically significant reduction in the proportion of the Hispanic noncitizen population in Arizona. The decline observed matches the timing of LAWA's implementation, deviates from the time series for the synthetic control group, and stands out relative to the distribution of placebo estimates for other states in the nation.

A number of years ago I had the opportunity to meet the strong man of the political resistance in Arizona, state senate president Russell Pearce, before he was brought down by establishment GOP maneuvering in a 2011 recall election. At the time, the former sheriff who had been wounded a couple of times in the line of duty, reminded me of another white-haired Arizona politician. He was like John McCain, except on the side of Americans.

Today, though, I'm reminded of another white-haired security warrior turned politician: Ariel Sharon.

Tyler Cowen's American Future: Regression to the Bean

To sum up, Mr. Cowen believes that America is dividing itself in two. At the top will be 10% to 15% of high achievers, the “Tiger Mother” kids if you like, whose self-motivation and mastery of technology will allow them to roar away into the future. Then there will be everyone else, slouching into an underfunded future of lower economic expectations, shantytowns and an endless diet of beans. I’m not kidding about the beans.  
Poor Americans, writes Mr. Cowen, will have to “reshape their tastes” and live more like Mexicans. “Don’t scoff at the beans,” he says. 

In other words, sure, America had its centuries in the sun as a high wage / low cost of land country as Benjamin Franklin pointed out in the first immigration restrictionist essay. But now America will suffer the inevitable fate first described by the Mexican polymath Francisco Galtonez in his landmark 1869 book Hereditary Peonage: Regression to the Bean.

Or America could do something about cutting back on immigration, but that's unthinkable, so: Beans ahoy!

January 12, 2014

Stanley Fischer's role in piratizing Russia's wealth

In the 1990s, a small coterie of economists at Harvard and MIT, such as Jeffrey Sachs, Larry Summers, Andrei Shleifer, Jonathan Hay, and Stanley Fischer, played a crucial role in recent history by advising the government of Russia to rapidly privatize its economy. Much of the wealth of Russia wound up being stolen by a tiny number of oligarchs.

The President has nominated Dr. Fischer, who recently resigned after eight years as head of the Israeli government's central bank, to be vice chairman of America's central bank, the Federal Reserve. This might be a good time to reflect upon the successes and failures of Dr. Fischer's recommendations in contributing to the Rape of Russia.

Fischer was not the public face of the experts from Cambridge, but he appears to have been a respected insider, as he remains today. His nomination to the Fed has been greeted with outpourings of praise from global financial insiders and very little skepticism from the less privileged.

As far as I know, nobody has ever accused Fischer of attempting to unethically profit off of the disaster he helped create in Russia, as the Federal government fined Shleifer and Harvard for doing.

Still, Fischer was there at the creation. He had numerous chances to speak out publicly about what was going horribly wrong in a Russia that looked to him and his friends for advice.

Fischer's role in Russia in the 1990s can be seen from contemporary documents:

From the Christian Science Monitor, June 19, 1991:
Yeltsin Arrives In US to Discuss Trade, Politics
US-SOVIET RELATIONS

EVEN before Boris Yeltsin touched down on United States soil June 18, the newly elected president of the Russian Republic had scored public relations victories on two fronts. ... 
Yeltsin arrives in the US at the height of debate over what the West should do, if anything, to prevent a possible collapse of the Soviet economy and promote genuine, lasting market reforms. 
The enthusiastic reception of Yeltsin's visit could bolster Gorbachev's bid for Western economic aid, because as a noncommunist and as the first democratically elected leader of Russia, Yeltsin could be instrumental in helping Gorbachev implement radical market reforms. 
Over the weekend the much-discussed "grand bargain" proposal linking Western aid to Soviet reform, drawn up by US and Soviet academics at Harvard University, was delivered to the White House and the Kremlin. 
... At the unveiling June 14 the plan's architects did not project an exact cost of the proposal, which would provide credits and cash to ease the hardships that would result from the shift to a market system and a convertible currency. But Stanley Fischer, an economist at the Massachusetts Institute of Technology (MIT) who took part in the project, says for the first few years the figures would be "large between $20 billion and $25 billion a year, a cost to be borne by the Western industrialized nations. 
The first step, says Dr. Fischer, is for the Soviet Union to gain associate status at the International Monetary Fund and the World Bank, which will then oversee the country's economic restructuring. The big change, he continues, would start in 1992, when price controls would be lifted, trade restrictions would be eased, and the money supply and budget deficit put under control. 
When asked if Yeltsin will support the plan, Mr. Yugin said, "I think we will." ...

Gorbachev aide Yevgeny Primakov and First Deputy Prime Minister Vladimir Shcherbakov, have distanced the Kremlin from Grigory Yavlinsky, the lead Soviet economist on the Harvard plan. 
Mr. Yavlinsky's murky status is "convenient for everybody involved," says Fischer of MIT. If the plan is deemed workable, everyone can embrace Yavlinsky's work, Fischer says. If not, the Kremlin will not be seen as having failed yet again to follow through on an economic reform plan.

This seems to be a recurrent theme: Dr. Fischer was publicly proud of not just his economic theory bona fides but also of his practical political expertise in the murky terrain of post-Soviet Russia.

From the Christian Science Monitor, June 5, 1992:
Improving the World With Academic Advice

RUSSIA'S First Deputy Prime Minister Yegor Gaidar knows quite a bit about the problems Latin American nations have had with populism and hyperinflation. That's because Rudiger Dornbusch, a Massachusetts Institute of Technology (MIT) economist [and co-author with Stanley Fischer of the textbook Macroeconomics], "Fed-Exed" the Russian economic reformer a bundle of 15 or so books on that topic, figuring it would help him deal with Russia's similar difficulties.

"He actually studied them," says Dr. Dornbusch, one of several United States professors giving economic advice to the Russians. 
Another MIT economist, Stanley Fischer, got back last Saturday from Moscow after spending several days working with the Russian Central Bank. 
These two aren't alone. A sizable group of well-known academics from MIT and Harvard University are acting as consultants, paid or unpaid, to foreign governments. Their advice is actually having some impact on world affairs. 
... "We do it because it is extremely interesting," Professor Fischer says. While in Moscow, for instance, he learned enough about the political situation to anticipate the resignation of the Central Bank's chairman, Georgi Matyukhin. He can even speculate on successors. Fischer also gives advice to Israel on visits to that country. 

Was Fischer simply embarrassingly naive about what these post-Soviet apparatchiks were up to? Or did he have some clue about the crimes being committed by those claiming to follow his advice?

Those seem like they would be interesting questions to ask him, so I'm betting no Congressman will ask them.

From the Christian Science Monitor, December 11, 1992:
MIT's Mr. Fischer hopes Gaidar [the acting prime minister] will push ahead even faster with privatization of industry, getting the budget in shape, and other reforms. But the Russian government, he says, doesn't have "a coherent policy" for dealing with the large enterprises within the "military-industrial complex." 

From the 2003 book The Piratization of Russia by economist Marshall I. Goldman:
Gaidar [acting Prime Minister of Russia in 1992] was a strong proponent of a market system. He was an even stronger advocate of privatization and, for that matter, a whole package of near-simultaneous reforms that came to be known as “shock therapy,” and today is called the “Washington Consensus.” Gaidar had come to this concept as a result of his studies as well as from a series of discussions with economists from both Eastern Europe and the United States. Among those interacting with Gaidar at one stage or another were Jeffrey Sachs, Andrei Shleifer, Jonathan Hay, all of Harvard University, Anders Aslund of Sweden, and, later, the Carnegie Endowment and Richard Layard of the London School of Economics. IMF officials and Stanley Fischer in particular had long advocated something similar, that is, simultaneous and far-reaching economic liberalization (that is, micro policy reforms combined with determined macro restrictions to curb inflation).

From Wikipedia' article on Yegor Gaidar:
Gaidar was often criticized for imposing ruthless reforms in 1992 with little care for their social impact. Many of Gaidar's economic reforms led to serious deterioration in living standards. Millions of Russians were thrown into poverty due to their savings being devalued by massive hyperinflation. Moreover, the privatization and break-up of state assets left over from the Soviet Union, which he played a big part in, led to much of the country's wealth being handed to a small group of powerful business executives, later known as the Russian oligarchs, for much less than what they were worth. As society grew to despise these figures and resent the economic and social turmoil caused by the reforms, Gaidar was often held by Russians as one of the men most responsible.[9][10]

So, was Fischer simply suffering from faulty Gai-dar? Or was his Gaidar working accurately, and the catastrophes suffered by the Russian people struck him as just a case of being unable to make an omelet without cracking some eggs? Or was the looting of Russia more a feature than a bug?

In 2011, after all these years, Fischer delivered the Gaidar Memorial Lecture, suggesting he doesn't feel betrayed by his Gaidar.

From the appendix of a 1993 Brookings Institution book Privatizing Russia by Shleifer, Maxim Boycko, and Robert W. Vishny, here are Fischer's comments on the success of the recommendations made by himself and his colleagues:
Comments and Discussion  
Stanley Fischer: Privatization stands out as the most successful element in the Russian reform program. Indeed, Russian privatization is even outpacing privatization in other countries in the former Soviet Union and in eastern Europe.

Conversely, the slower pace of privatization in countries like Poland shows that the Rape of Russia didn't have to happen, or least not as disastrously.
This interesting paper, written by some of the important thinkers behind the program, helps explain why.  
... Apparently, the authors, like other observers, do not yet see much in the way of restructuring taking place.  
Does that mean that the authors should have urged delaying privatization until they had invented a scheme that would guarantee rapid restructuring? The answer is no, because it was crucial to move these firms out of direct state control. Should the lack of restructuring cause a slowdown of the privatization process? Again, the answer is no, for the same reason.
... Was there an alternative that would have produced more rapid restructuring? The answer is yes, but that decision belonged not to the privatizers but to Boris Yeltsin. He could have pushed for a more aggressive reform program, but chose instead to confront his congressional rivals more slowly.  
... The paper gives the impression that all politicians are bad. But at some point it becomes clear that Anatoly Chubais, Boris Yeltsin, and the reformers are good politicians. So this is really a paper about the good guys versus the bad guys, and we do not know what drives the good guys, and what differentiates them, except that we are on their side and they on ours.
... Beyond the privatization of industrial firms lies the challenge of privatizing agriculture and housing. Given the speed at which the current privatization is proceeding, the authors will soon be able to turn their talents to those problems. 

In 1994, Fischer became America's man at the International Monetary Fund, its number two official. (By custom, Europe gets the top IMF guy, while America gets the top World Bank official.) On January 9, 1998, Fischer delivered this less than prescient speech:
The Russian Economy at the Start of 1998 
Stanley Fischer 
January 9, 1998 
Six years after the start of the Russian economic reform process, much has been achieved and the continued progress of the economy towards economic normalization is not in doubt. ... 
Nineteen ninety seven was a year of achievement for the Russian economy. 
For the first time since 1992, the economy grew, albeit barely. The current account of the balance of payments was in surplus. The Central Bank of Russia once again proved its professionalism, as inflation continued to decline, and as late in the year it successfully fought off contagion effects from East Asia and maintained the currency band. At the start of 1998, with a broadened currency band, and a non-confiscatory currency reform under way, confidence in the maintenance of monetary stability should continue to strengthen. 
In 1997, as in 1996, central government revenue shortfalls constituted the major failure of macroeconomic policy. At the start of 1998, fiscal reform and performance remain both the crucial element and the crucial question at the center of Russia’s economic program with the IMF. The reform of the tax code and increased revenue collection are on one side of the equation; on the other side, increasing the efficiency of government spending and strengthening expenditure management deserve no less attention. Equally important for future growth is continued progress with structural reforms, whose implementation had for some years lagged until recently -- but it must be noted and emphasized that the structural components of the Russian reform program moved ahead as agreed with the IMF (indeed even a little faster) during 1997. 
I am also happy to report that the IMF Executive Board yesterday completed the delayed sixth quarterly review of the Extended Fund Facility with Russia, and -- laying particular stress on the fiscal action plan agreed between the Russian authorities and the Fund staff in December -- agreed to disburse a $700 million tranche, thus bringing the program back on track. 
I. Achievements of the past six years. 
Six years ago, Russia set out on the road to a market economy by liberalizing prices and beginning to dismantle the instruments of central planning. In these six years, Russia has made remarkable progress in important areas. ... 
Market development: A large and increasing share of Russian economic activity is channeled through market mechanisms. In its latest Transition Report, the EBRD estimates that 70 percent of GDP is accounted for by the private sector.4 This vibrant private sector, for all its imperfections, has become the major agent of economic growth and change. 
... The experience of other transition economies, as analyzed in a number of studies, suggests that Russia will move onto a sustained growth path as inflation falls and fiscal adjustment and structural reforms proceed. In many respects, Russia has an exceptionally favorable basis to achieve that end: important natural resources, including minerals and energy; a highly educated labor force, which is still employed to a large extent in the less productive state sector; and a potentially large domestic market with pent-up demand for consumer goods and social infrastructure. However, a major constraint to Russia attaining satisfactory rates of growth is that the process of structural reform has not gone far enough. 
Indeed, empirical analysis has shown that the main reason why growth in Russia and other CIS countries lags behind the record of the Eastern European and Baltic countries is the slower pace of market-oriented structural reform.6 While Russia has made substantial strides in some areas of structural reform (notably small scale privatization, the liberalization of the trade and foreign exchange system and, to a lesser extent, natural monopoly regulation), there are important areas where much more progress is needed. 
... With macroeconomic stability close to being attained, the focus now must shift to structural reform, particularly private sector development. A fast pace of economic recovery will demand substantial increases in efficiency and capital accumulation, and these in turn demand a competitive business environment. Certain elements of such a business environment (such as a market culture) cannot be developed rapidly or established by government action, but other major elements (including the legal and institutional framework) can be. Such efforts are under way in several areas: 
1. Faster, more transparent privatization and improved management of state-owned enterprises. The privatization program was stepped up in 1997 after a disappointing record in 1996, and the Government’s privatization plan for 1998 envisages a further acceleration. The new privatization norms call for an open, transparent, and competitive process -- elements of which were missing in earlier waves of privatization.

You know, there's an inherent trade-off between velocity and transparency of privatization schemes. The faster you push privatization, the more likely it is to turn out to be piratization. Is it really too much to ask that seven years or more after he began poking his nose in Russian affairs that Dr. Fischer might have figured that out by 1998?
... In summary, Russian economic reform is entering a less dramatic phase than that of the last few years: the most important battles in securing macroeconomic stabilization and creating a market economy have been won; but much remains to be done to secure the future growth of the economy. 
Up to this point, the optimists on Russia have been more right than the pessimists. There is good reason to believe the optimists will continue to be right.

Eight months and eight days after Fischer's speech, Russia defaulted.

Dr. Fischer is a thoughtful man who is not always afraid to say he was wrong in the past; but nobody today seems to be interested in giving him a chance to publicly reflect upon anything he has learned from the world-historical mistakes that he and other elite economists made regarding Russia in the 1990s.

Who knows? Maybe he'd like to take this opportunity to apologize to the Russian people ...

But, even if Fischer's conscience is bothering him about the Rape of Russia, it's not that likely that he'll be given much of a chance to apologize for screwing up so badly. There really isn't much of a market for skepticism about the documented track records of Federal Reserve leaders.

Thus, for years Alan Greenspan was treated as a genius by the media, because ... what if he weren't really a genius? What if he were just some Ayn Rand cultist? Well, that possibility was too horrible to contemplate, so everybody agreed to keep him in office over and over until almost his 80th birthday in 2006. What could possibly go wrong?

Instead, it's best not to undermine confidence by asking our economic superiors to account for their track records.