January 10, 2004

Is George W. Bush Really This Big an Idiot?

From Edmund Andrews of the New York Times:

Growth in Jobs Came to a Halt During December: ...President Bush, speaking in Washington before a group of small-business owners, focused on the drop in the unemployment rate, which he called "a positive sign that the economy is getting better."

According to the household survey, the number of people at work fell by a net 54,000 in December. Nevertheless, the unemployment rate fell because a net 309,000 people stopped looking for work and so dropped out of the labor force.

Does George W. Bush really believe that this is good news?

Posted by DeLong at January 10, 2004 10:10 AM | TrackBack

Comments

Well, yes, Bush is an idiot, but I think that the BLS should present a more realistic unemployment number as "official" number, such as their U-6 measure of unemployment. The current measure (U-3) is just utterly misleading and doesn't seem to be relevant, if one would like compare U.S. unemployment figures with unemployment figures in other countries.

Posted by: Nescio on January 10, 2004 10:45 AM

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Are there really any people left who don't think Bush is not the sharpest tool in the shed. Makes me long for the days of Clinton and a republican congress.

Posted by: William on January 10, 2004 11:16 AM

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No, he just believes, correctly, that he will not be challenged on his deceptions in any widely known forum. NPR was using "drop in the unemployement rate" as their leadoff sentence. WHY? WHY?

By the way, what is the name for the "unemployed" + "discouraged workers" statistic? Is there a name?

Posted by: Randolph Fritz on January 10, 2004 11:20 AM

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Bush can't be any more stupid than the people who are voting for him.

Posted by: Alan on January 10, 2004 11:27 AM

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GWB showing concern in his Saturday Address:
"Now is not the time to turn our backs on America's families and workers and entrepreneurs by letting much needed tax relief expire. Making tax relief permanent is a simple step that would keep our economy growing."

His agenda this year:
"I will call on Congress to make permanent all the tax relief we have delivered to the American people and our nation's small businesses."

[Transcript available at Whitehouse.gov]

Posted by: leo on January 10, 2004 11:32 AM

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With Bush, it's always a toss-up as to whether he's just being stupid, or purposefully misleading.

Posted by: Chris Wage on January 10, 2004 11:37 AM

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They're not exclusive.

Posted by: Tim H. on January 10, 2004 11:40 AM

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Chris: don't be naive. Bush isn't stupid. This has been the biggest deception in American political history. Bush is not even being coy about making the tax cuts permanent. Krugman has alleged that this is a covert manuever by the Republicans. But now they are fully out in the open about it. Bush knows that they have marginalized Krugman by constantly calling him shrill, and knowing that the blowhard media types are jealous of Krugman because he actually can think critically about issues, so they ignore him. Bush knows that most people will not be able to put together making the tax cuts permanent and long-term damage it will do to the budget deficits and ultimately services provided by the government, so now they do not even pretend what their true objectives have been all along. Now we find out from Paul O'Neill that the Bush boys have been planning this all along. Also, read about the Bush family in Kevin Phillips' "American Dynasty." It is interesting how the Bush team is portraying O'Neill as a bitter loon. They will get him. Bush is savage. He takes no prisoners. Phillips is interesting as well. He'll be marginalized by saying he just an old man ranting from his den in Connecticut. Also, they don't have to worry because not too many people read the book.

Posted by: Cal on January 10, 2004 11:54 AM

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Richard Clarke is coming along with something about Bush's pre-9/11 indifference to terrorism. They will smear him, but this might get attention.

O'Neill has said that he would be surprised by personal attacks. I couldn't say whether he's unbelievably naive or whether he's just setting up for a counter-attack.

I don't know how characteristic the trolls that come onto liberal sites are, but it is indeed possible that they are quite typical. A high proportion af Americans are completely cynical about politics, and the Republicans play heavily to that. (Cynics don't think they'r suckers, but they are.) Republican cynics play it as a game where the loudest and most devious partisan wins, and the possibility of their listening to anyone who disagrees is zero.

Posted by: Zizka on January 10, 2004 12:06 PM

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Notice the different take from Louis Uchitelle in the front page story: http://www.nytimes.com/2004/01/10/business/10ECON.html


Job growth came to an unexpected halt in December, the Bureau of Labor Statistics reported yesterday, and rather than hunt for scarce work, tens of thousands of people disappeared from the labor force.

Most forecasters had said they thought December would be a breakthrough month for job creation, given the strengthening economy. But instead of the 150,000 new jobs they had expected, there were a minuscule 1,000. The unemployment rate dropped to 5.7 percent from 5.9 percent in November, but that was mainly because so many people chose not to look for work, a requirement to be counted as unemployed.

Both paragraphs make the point that the fall in the unemployment rate is directly the result of people leaving the job market.

The article shows that it is possible to report reasonably accurately, a hopeful sign.


Posted by: masaccio on January 10, 2004 12:12 PM

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"...By the way, what is the name for the "unemployed" + "discouraged workers" statistic? Is there a name?..."

None, I'm afraid.

In fact, I understand some conservatives believe there is really no such thing as "unemployment" either, only freeloaders who just don't want to work, because, when you accept wages low enough, you can sure get a job. How about that?
:)

Posted by: bulent on January 10, 2004 12:13 PM

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Notice the different take from Louis Uchitelle in the front page story: http://www.nytimes.com/2004/01/10/business/10ECON.html


Job growth came to an unexpected halt in December, the Bureau of Labor Statistics reported yesterday, and rather than hunt for scarce work, tens of thousands of people disappeared from the labor force.

Most forecasters had said they thought December would be a breakthrough month for job creation, given the strengthening economy. But instead of the 150,000 new jobs they had expected, there were a minuscule 1,000. The unemployment rate dropped to 5.7 percent from 5.9 percent in November, but that was mainly because so many people chose not to look for work, a requirement to be counted as unemployed.

Both paragraphs make the point that the fall in the unemployment rate is directly the result of people leaving the job market.

The article shows that it is possible to report reasonably accurately, a hopeful sign.


Posted by: masaccio on January 10, 2004 12:17 PM

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Henry C K Liu has a very interesting piece on US Fed policy in Asia Times.

http://www.atimes.com/atimes/Global_Economy/FA10Dj01.html

"The so-called political support for stable prices contradicts the budget deficits of the Reagan administration and the two Bush administrations. Globalization did contribute to US domestic price stability through global wage arbitrage but it produced an overvalued exchange rate for the dollar and massive loss of jobs at home. As for productivity, the productivity boom in the US was as much a mirage as the money that drove the apparent boom. There was no productivity boom in the US in the last two decades of the 20th century; there was an import boom that came with productivity fallouts. What's more, this boom was driven not by the spectacular growth of the American economy; it was driven by debt borrowed from the low-wage countries producing this wealth. The acceleration of productivity was accomplished by someone else doing the producing without getting proper credit for it. Otherwise, it would not be called a bubble. "

Posted by: bakho on January 10, 2004 12:46 PM

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Answer to that question about the broader measure of unemployment:

Every month, at the front of its employment situation report, the BLS publishes the "employment to population ratio". If you subtract this ratio from 100%, you get the broadest measure of non-employment available.

So while there is no formal measure of the concept that interests you, its arithmetic inverse is readily available. Incidentally, this
employment to population ratio fell last month, reflecting the drop in the household survey's measure of total employment. Accordingly, the non-employment rate (my awkward term) is near its cyclical peak.

Posted by: Gerard MacDonell on January 10, 2004 12:57 PM

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On the evidence I would not call Bush an idiot. Intelligence is supposed to be adaptive. He is US President. I call him well-adapted. If anyone in this group is better off than him - you can call him an idiot. I call Saddam an idiot.

Posted by: Leopold on January 10, 2004 12:57 PM

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On the evidence I would not call Bush an idiot. Intelligence is supposed to be adaptive. He is US President. I call him well-adapted. If anyone in this group is better off than him - you can call him an idiot. I call Saddam an idiot.

Posted by: Leopold on January 10, 2004 01:02 PM

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"There was no productivity boom in the US in the last two decades of the 20th century; there was an import boom that came with productivity fallouts. "

It's frightening to think that our productivity statistics could be so misleading.

Posted by: camille roy on January 10, 2004 01:05 PM

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Bakho is absolutely right. Liu's article makes very good reading. Unfortunately, he packs in everything except the Peloponnesian wars (but don't let that put anyone off from reading it in its entirety.) Here are the excerpts I think are most important:

There was no productivity boom in the US in the last two decades of the 20th century; there was an import boom that came with productivity fallouts. What's more, this boom was driven not by the spectacular growth of the American economy; it was driven by debt borrowed from the low-wage countries producing this wealth. The acceleration of productivity was accomplished by someone else doing the producing without getting proper credit for it. Otherwise, it would not be called a bubble.

[...]

[A prescient statement by Liu in 1998]

"US financial assets are built on debt. Debt is not intrinsically objectionable if it is properly collateralized by real assets. Yet as economists know, money is created whenever two parties enter into a mutual debt obligation (Hyman Minsky). The size of the invisible money pool created by financial derivatives is now many times (no one knows how many) the amount of M3. One firm alone, LTCM, commanded open positions of US$1.2 trillion financed by 100-fold leverage. That is the entire daily transactional value of the world's foreign exchange markets. Another hedge fund (Tiger Management) can suffer asset evaporation (loss) in the amount of US$20 billion in 6 hours by a 10 percent appreciation of a single currency (yen) against the USD.

[...]

"This invisible supply of virtual liquidity supports an artificial level of asset value very much detached from fundamentals, and the unbundling of their underlying open private contracts will inevitably cause drastic readjustments in asset prices in the formal markets.

"The securitization of debt blurs the all important dividing line between debtor and creditor, and allows an economy to borrow from itself, not just against its future, but against its current and less sophisticated debt.

[...]

Pugnacious policy: ship jobs, keep unemployment high
Thus according to Greenspan, keeping asset prices high and product prices low is now the sworn aim of the central bank. Of course, the largest component in low product price is low wages and the largest component in high asset price is also low wages. The combination adds up to one thing, low wages at all cost. And how do you keep wages low? Ship jobs overseas and keep domestic unemployment high. This is the pugnacious economics of Greenspanism.

From http://www.atimes.com/atimes/Global_Economy/FA10Dj01.html


Posted by: Charles on January 10, 2004 01:17 PM

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I call Henry C K Liu an idiot. Seriously, folks: the monetary policy (Fed) has nothing to do with the core of US problem: we consume more than we produce. It will come out one way or the other: either high unemployment or high prices. Personally, I think high prices is a lesser evil. But it is really not Greenspunk's fault.

Posted by: Leopold on January 10, 2004 02:00 PM

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I call Henry C K Liu an idiot. Seriously, folks: the monetary policy (Fed) has nothing to do with the core of US problem: we consume more than we produce. It will come out one way or the other: either high unemployment or high prices. Personally, I think high prices is a lesser evil. But it is really not Greenspunk's fault.

Posted by: Leopold on January 10, 2004 02:05 PM

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The current American attitude seems to be viewing cheap Asian labour as an entitlement rather than a short-term privilege driven by the relative underdevelopment of Asian capital markets. But who honestly cares if the dollar is worth less tomorrow? It's worth a hell of a lot today in relative terms, and consumers would be fools not to take advantage of it.

Perhaps the interests of protectionist-minded policy-makers do not concide with those of US consumers.....

Posted by: trevelyan on January 10, 2004 02:48 PM

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Leopold: according to your theory of intelligence not too long ago Saddam must have been the brightest fellow in Iraq, now he's an idiot.

actually this reminds me of an argument I had once with a fellow who seemed to think that the comic Martin Lawrence was smarter than I was because he made more money. The interesting thing was that I made more money than the guy I was arguing with, so I said I wouldn't accept an argument from my intellectual inferior.

we are all familiar with examples from history of a reputed genius dieing poor and in misery, they failed to adapt. As intelligence is adaptive, these so-called geniuses were all retards. Is that right?

Posted by: bryan on January 10, 2004 02:49 PM

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Bryan:

I did not mean to imply that success by itself equals intelligence. What I said is that _I_ would not be responsible to attribute Bush's success to the factors other than intelligence and that the best judge is whoever had similar success. It does not mean I think what Bush does is good for this country - quite the reverse.

Saddam is an idiot on the merits: he could suck up and be forgiven, he could run and live the rest of his life in luxury, he could make a stand and die a hero in his eyes - he made the choices that led inevitably to the life of the prisoner, trial and (likely) eventual execution instead.

Posted by: Leopold on January 10, 2004 03:27 PM

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""...By the way, what is the name for the "unemployed" + "discouraged workers" statistic? Is there a name?...""

"None, I'm afraid."

Discouraged "workers" _are_ unemployed. The narrow definition of unemployent used by the BLS and the corresponding U-3 rate are simply misleading. On the other hand, it is difficult to define and measure:

"Yes I want a job. But I'm saving the cost of looking (driving, sending letters, eating outside the house) when I know I can't find one."
"Yes I want a job. But I have to put my child in daycare and the job doesn't pay enough to afford it."
"Yes I want a job. But I need a car to get there and I can't afford one."
And:
"Yes I want a job. But not this crap, thank you very much."
etc. etc.

I'm sure all are available, but it's difficult to measure the extent.

Regarding the freeloader accusation, it is interesting what attitudes people can develop when they consider themselves in a safe situation. I.e. "good and motivated people (like myself) will always find work", etc. This is to some extent a defensive mechanism; nobody wants to feel unsafe and threatened, and attributing personal flaws (that you don't have, of course) to others helps to explain things in a comforting way.

Posted by: cm on January 10, 2004 03:40 PM

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Gerard: re employment/population ration

It is an important indicator, but it does not give us the whole picture as well. What unemployment tries to measure is how many people are involutarily not working, the reasoning being that if people are looking for work but can't find it, the economy performs below potential.

Maybe the employment ratio fell because people are so well off that they don't have to work anymore (yeah right)? Sound familiar?

One of the problems is that nobody knows what the "potential" of the economy is, and maybe it's even an ill-defined notion.

Suppose hypothetically that you would be living in a highly productive (on all counts) economy where everybody has a good living standard and is happy. Why would a higher "employment" ratio (in the sense of paid labor participation) be desirable then?

Posted by: cm on January 10, 2004 04:04 PM

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bakho: Good point that, and I agree. So much of even the "real" productivity is just busywork (at least in the bigger picture), and I wonder why nobody will (wants to?) see it. Often improvements in software tools and computer technology just enable people to do more busywork per unit of time. Anybody remember the "paperless office"?

camille: The frightening part is that so many intelligent people and even professionals who should know better are fooled. Are they not questioning the fundamentals (i.e. how productivity effects actually work in the economy)?

But I have to read the whole article. It's quite lengthy.

Posted by: cm on January 10, 2004 04:18 PM

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Henry C K Liu is, to put mildly, a crank, and time spent contemplating the wisdom of his incoherent ramblings is time ill-spent. He is, to begin with, a fervent defender of Mao, whom he continues to insist was not responsible for the 30 million or so deaths caused by the Great Leap Forward: http://archives.econ.utah.edu/archives/pen-l/1999m06.a/msg00019.htm or, judging from the last line of this endless post, for the excesses of the Cultural Revolution, either. So his pronouncements on any aspect of economics ought to be taken with, at best, a grain of salt.

More substantively, his account of the productivity boom -- which no one believes has lasted two decades, since it only became in 1995 -- is simply incomprehensible. What does this mean?: "this boom was driven not by the spectacular growth of the American economy; debt borrowed from the low-wage countries producing this wealth. The acceleration of productivity was accomplished by someone else doing the producing without getting proper credit for it. Otherwise, it would not be called a bubble." Productivity is not ultimately driven by growth: it drives growth. And productivity measures output per hour worked by Americans, not foreigners, so "someone else doing the producing" does not boost productivity. And no one has ever called the productivity boom a bubble: what's striking is precisely how it endured after the asset-market bubble burst.

His account of LTCM is simply deceptive. LTCM used unbelievable amounts of leverage, but the $1.2 trillion -- if it's even accurate -- was the notional amount of its derivatives, not an amount of money that was ever invested or was ever at risk.

"The securitization of debt blurs the all important dividing line between debtor and creditor, and allows an economy to borrow from itself, not just against its future, but against its current and less sophisticated debt." Charles, you quoted this. Could you explain what it means in English?

And this is the topper: "Thus according to Greenspan, keeping asset prices high and product prices low is now the sworn aim of the central bank. Of course, the largest component in low product price is low wages and the largest component in high asset price is also low wages. The combination adds up to one thing, low wages at all cost. And how do you keep wages low? Ship jobs overseas and keep domestic unemployment high."

First of all, if you read the Greenspan quote, it's clear he's not saying that Fed policy should be to keep asset prices high, but that the growing importance of asset prices in influencing people's consumption means that the Fed needs to look more deeply at assets when formulating monetary policy. More important, thirty or forty paragraphs earlier, Liu dismissed the fall in unemployment in the late 1990s as the result of the telecom and dot com frenzy, that is, the result of higher asset prices. So Liu apparently believes that higher asset prices lead to lower unemployment and higher wages and that they lead to higher unemployment and lower wages.

I'm sure he has some dialectical explanation for how this is the case.

Posted by: Steve Carr on January 10, 2004 04:57 PM

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Sorry, I omitted the second link (with the reference to the Cultural Revolution). It's here: http://lists.econ.utah.edu/pipermail/leninist-international/1999-June/004180.html.

Posted by: Steve Carr on January 10, 2004 05:02 PM

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Idiot? Perhaps. But in this case he's just being dishonest.

Posted by: Stephane on January 10, 2004 09:01 PM

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The unemployment rate is going down because people are getting jobs, the unemployment rate is going down because the economy is hemorrhaging members of the labor pool... it all ties into the new Bush/Cheney 2004 campaign slogan:

"What's the difference?"

Posted by: Norbizness on January 10, 2004 10:12 PM

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i posit that leopold may be an idiot due not only to specious logic used to invalidate mr. delong's correct evaluation of the idiot-in-chief, but also because he keeps double posting.

Posted by: nova silverpill on January 10, 2004 10:16 PM

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Leopold writes: "On the evidence I would not call Bush an idiot. Intelligence is supposed to be adaptive. He is US President."

What does being President have to do with his ability? It's not like there's an entrance exam. It's not like he worked his way up through the administrative branch.

The only qualifications to be President are age and nationality of birth.

Posted by: Jon H on January 10, 2004 10:18 PM

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John H wrote: The only qualifications to be President are age and nationality of birth.

There is also a little thing called an election. My point is that you cannot reasonably dismiss the intelligence as a factor in success without matching that success - just like you cannot reasonably say "This Tyson guy - he is weak" if the only person you ever beat up was your younger brother when he was 2 years old.

Posted by: Leopold on January 10, 2004 10:27 PM

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John H wrote: The only qualifications to be President are age and nationality of birth.

There is also a little thing called an election. My point is that you cannot reasonably dismiss the intelligence as a factor in success without matching that success - just like you cannot reasonably say "This Tyson guy - he is weak" if the only person you ever beat up was your younger brother when he was 2 years old.

Posted by: Leopold on January 10, 2004 10:32 PM

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Leopold says, "Seriously, folks: the monetary policy (Fed) has nothing to do with the core of US problem: we consume more than we produce."

Leopold, if the Fed had not insulated the system from the folly of running chronic trade deficits, things would not be in the parlous state they are. The fear of a dollar crisis is real and

________________________________________________________

Steve Carr asks, "[quoting Liu] 'The securitization of debt blurs the all important dividing line between debtor and creditor, and allows an economy to borrow from itself, not just against its future, but against its current and less sophisticated debt.' Charles, you quoted this. Could you explain what it means in English?"

It means that normal debt is converted by complicated financial games into securities that no one really understands. This is what Enron did. It effectively relabeled a liability as an asset, thereby borrowing against what is normally understood as debt.

The procedure is more common than is generally realized, and has been responsible for many financial crises.

I realize that many Americans have difficulty following Asian circumlocutions, but I think you are labeling him a crank basically because of a faulure to understand what he's saying, rather than over substance. I understood very different things from the links you provided than you seem to have done (but refuse to get sucked into extraneous Usenet flame wars by saying more.)

In any event, anyone who recognized the problem of "borrowing against debt" in 1998 deserves some credit. If we had had a few more "cranks" like that in our press, a lot of Enron and Worldcom employees and shareholders would be much happier right now.

Posted by: Charles on January 10, 2004 11:05 PM

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nova silverpill writes: i posit that leopold may be an idiot due...

Well, its a free country. You call me an idiot. I call you Henry C K Liu in disguise.

Posted by: Leopold on January 10, 2004 11:17 PM

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Charles wrote: Leopold, if the Fed had not insulated the system from the folly of running chronic trade deficits, things would not be in the parlous state they are. The fear of a dollar crisis is real and...

Charles, it was mostly central banks in Asia that were buying Treasuries. Maybe there is some clever agreement that US does not throw any import barriers while they are doing so - personally I think what would be too much to expect from our goverment. In any case, at some point they will stop (they may be slowing down already) and the dollar will fall, prices in US raise and unemployment drop a little bit. Fed does not really have much to do with it.

Posted by: Leopold on January 10, 2004 11:29 PM

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Yeah, just watch that idiot accomplish nearly everything he sets his mind(s) to. It's called spin. Randolph Fritz had it right, up thread, when he said, "No, he just believes, correctly, that he will not be challenged on his deceptions in any widely known forum. NPR was using "drop in the unemployement rate" as their leadoff sentence."

The Bush is an idiot line is a dead end for liberals. It doesn't get traction with the people who find his Kennebunkport, Yale, Harvard ... I mean Texas accent charming and his straightforward manner refreshing after Clinton.

In my book, the ability to achieve stated goals is a mark of intelligence, so to me it would seem that Bush is smarter than anyone with any clout in the Democratic party right now.

Bush is a liar. Bush distrusts Democracy. Bush is shovelling money up the food chain like nobody's business. Bush has isolated the US and burn up the wave of international goodwill after 9/11. But, please stop calling him an idiot. Its not true and it doesn't persuade anyone who needs persuading.

Posted by: Marc Brazeau on January 11, 2004 12:03 AM

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Liu makes a number of assertions that are problematic. The most obvious one related to productivity has already been addressed. Even the title: “Fed's pugnacious policies hurt economies” appears inaccurate since he only appears to talk about the US economy and he provides no alternative history that different policies might have created. This one is another whopper: “Corporate profit in 2003 came mostly from the effect of a falling dollar on non-dollar revenue of US corporations whose stock prices and dividend payouts are denominated in dollars.” One hardly knows where to start.

Further, what he seems to be saying is that “the free flow of money” which I call liquidity) is bad. Or at least the amount of liquidity that Greenspan supports is bad. That begs the question: what is the right amount of liquidity? He seems to imply that the wealth of the United States (e.g. the value of our assets) is an illusion. In one sense, he is correct since, for example, the value of my house requires a number of people to believe it is worth what we all agree it is worth. Should liquidity disappear that value is likely to substantially drop. This would make me, and eventually my mortgage company, very unhappy. Is our faith in the value of our homes an illusion?

Re: his 1998 article. I am not an economist, but I was in the middle of a dot.com (having spent 15 years in aerospace work) and it was very clear that something was not right. Nice to know that some other folks noticed.

Posted by: Robert on January 11, 2004 07:50 AM

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Leopold says, "Charles, it was mostly central banks in Asia that were buying Treasuries. Maybe there is some clever agreement that US does not throw any import barriers while they are doing so - personally I think what would be too much to expect from our goverment. In any case, at some point they will stop (they may be slowing down already) and the dollar will fall, prices in US raise and unemployment drop a little bit. Fed does not really have much to do with it. "

I'm speaking of a development that dates back almost 20 years to the Plaza Accords, Leopold and, I'l freely concede, to policy that both parties have embraced, a policy that goes well beyond the Fed. But the Fed is the key player in this.

Current account deficits of the size run by the US since the 1980s should have caused the dollar to fall much further than it has. There have been many reasons for that. As you point out, Asia wants a strong dollar to give their export industries an edge. For brief periods, that's fine. But a general principle of economics is that the longer that things travel away from equilibrium, the more painful the eventual adjustment is likely to be.

We are in this situation with trade. We are heavily dependent on the rest of the world for many key things, most notably oil. But the huge trade deficit signals broader danger. Americans are not producing what other countries want or need. Even industries such as agriculture and chemicals, which used to be big export pluses, have weakened. Of our productive capacity in this country, we have sold off enormous assets to foreigners.

It's not alarmist to say that these trends cannot continue forever. It's not sensible to continue to protect the US economy from the consequences of its actions by holding interest rates near zero.

______________________________________

Robert quotes Liu, "This one is another whopper: “Corporate profit in 2003 came mostly from the effect of a falling dollar on non-dollar revenue of US corporations whose stock prices and dividend payouts are denominated in dollars.” One hardly knows where to start."

As stated, I agree it's not correct, Robert. But what is true is that *multinationals and *exporters* did enjoy increased dollar-denominated profit. The business press has remarked on this issue and how the cheap dollar has attracted foreign stock buyers.

For example, Business Week, 11/17/03, "A Weak Greenback? It's Profit Fuel." (which talks about future developments. Or, May 26th, "Good News! The Dollar Is Down", "Just as important, the dollar downdraft is already having a salutary effect on profits -- and the stock market -- by raising the overseas earnings of Corporate America. In the last few days alone, a string of companies, from Wal-Mart Stores (WMT ) and Procter & Gamble (PG ) to farm-equipment maker Deere (DE ) have joined the parade of companies reporting sharply higher foreign sales and earnings thanks to dollar-induced gains."

Getting precise figures is never easy, and for that matter, it's too soon to know what the full effect of exchange rates on profits has been. However, it does not take a genius to figure out that if one-third of a company's profits are from sales are in Europe, the dollar drops by 20%, the company elects not to lower prices to gain market share, and demand stays constant, the company's profits rise by 6 percentage points. It would be perfectly accurate to say, "Without the dollar's decline, corporate profits would have looked much less rosy than they did in 2003."

Liu's statement was certainly sloppy, but calling it a "whopper" is stretching things a bit.

As for the "free flow of money", this is a matter of being accustomed to talking to foreigners. The correct colloquialism is "easy money".

Easy money is not liquidity. Liquidity is the ability to reasily convert hard assets into money. Easy money is low interest rates. It's true that if interest rates rise, the value of your house will fall. That's not good for existing owners, but good for people who want to buy.

As for having "faith in the value of our homes" ...faith is for God, not financial decisions. House prices do drop, sometimes catastrophically, and not just because of interest rates.

Posted by: Charles on January 11, 2004 09:49 AM

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Simple answer: Bush Lied.

Posted by: praktike on January 11, 2004 09:54 AM

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Actually, I called Henry Liu a crank not because I don't understand what he's saying, but because he's a crank. Every one of his passages cited in this thread has something either theoretically or factually wrong with it or both. As for the specific passage that I asked Charles to clarify, the part that I think is wilfully confusing is this: "blurs the all-important dividing line between debtor and creditor." This seems to mean, as Liu goes on to say, that the U.S. is borrowing from itself. What does this mean? And if it means anything, how is it bad? If I'm going to buy a house, and instead of taking out a loan I dip into my savings to pay for the house, I suppose you could say I'm borrowing from myself, but I don't see how this is a problem.

"Securitization of debt" does not mean, at least not in any conventional sense of the phrase, "that normal debt is converted by complicated financial games into securities that no one really understands." The most familiar, and important, form of securitization in the U.S. is the packaging of home mortgages into securities that other investors can buy. That facilitates the diversification of risk, making markets more efficient and lowering borrowing costs. Many fewer Americans would own their homes if mortgages had not been securitized. For that matter, issuing public stock in a company is a securitization of future cash flow. Securitization, like most financial tools, can be abused, but on the whole its benefits clearly outweigh its costs.

As for Enron, I'd like a concrete example of the company "relabeling a liability as an asset." Enron did a lot of shuffling liabilities off its balance sheet by setting up special-purpose entities, etc. But the whole point of Enron's strategy was to get rid of assets -- "asset-light" was Skilling's mantra. So relabeling liabilities as assets would hardly have been something he was anxious to do.

Frankly, I'm sure the ins and outs of this stuff are relatively boring to most people. The problem is that Liu is doing the very same thing Enron did: using pseudo-intelligent rhetoric and financial jargon to disguise an ultimately incoherent endeavor. This has nothing to do with "Asian circumlocutions," either. Liu was clear enough when he was exculpating Mao for the Great Leap Forward and holding Brad DeLong personally responsible for the death of 90 million people because of his support for neoliberalism. It's only when it comes to global finance that Liu becomes incomprehensible (though in both cases he's wrong).

Posted by: Steve Carr on January 11, 2004 10:41 AM

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Maybe you make too much of the plight of those "discouraged" persons who are not counted in the official unemployment rate. By what means do such people maintain themselves if they are not seeking work and can apparently afford to just chill out for a while? Maybe many of these "discouraged" persons have the accumulated wealth (or a highly compensated spouse/lover) to just chill until the job market improves to the point where they can obtain the type of employment they prefer as opposed to a job to maintain themselves.

Under this view, those who are both "discouraged" and financially secure are to be celebrated: they are strong enough and financially able to resist working at just a job. Instead they prefer to wait for the opportunity to work at their advocation. This could just as well be a feature of a wealthy society that values work in a preferential way. How do economists and statisticians account for people of this status and persuasion?

Posted by: Lawrence on January 11, 2004 11:01 AM

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Maybe you make too much of the plight of those "discouraged" persons who are not counted in the official unemployment rate. By what means do such people maintain themselves if they are not seeking work and can apparently afford to just chill out for a while? Maybe many of these "discouraged" persons have the accumulated wealth (or a highly compensated spouse/lover) to just chill until the job market improves to the point where they can obtain the type of employment they prefer as opposed to a job to maintain themselves.

Under this view, those who are both "discouraged" and financially secure are to be celebrated: they are strong enough and financially able to resist working at just a job. Instead they prefer to wait for the opportunity to work at their advocation. This could just as well be a feature of a wealthy society that values work in a preferential way. How do economists and statisticians account for people of this status and persuasion?

Posted by: Lawrence on January 11, 2004 11:07 AM

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Maybe you make too much of the plight of those "discouraged" persons who are not counted in the official unemployment rate. By what means do such people maintain themselves if they are not seeking work and can apparently afford to just chill out for a while? Maybe many of these "discouraged" persons have the accumulated wealth (or a highly compensated spouse/lover) to just chill until the job market improves to the point where they can obtain the type of employment they prefer as opposed to a job to maintain themselves.

Under this view, those who are both "discouraged" and financially secure are to be celebrated: they are strong enough and financially able to resist working at just a job. Instead they prefer to wait for the opportunity to work at their advocation. This could just as well be a feature of a wealthy society that values work in a preferential way. How do economists and statisticians account for people of this status and persuasion?

Posted by: Lawrence on January 11, 2004 11:10 AM

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Maybe you make too much of the plight of those "discouraged" persons who are not counted in the official unemployment rate. By what means do such people maintain themselves if they are not seeking work and can apparently afford to just chill out for a while? Maybe many of these "discouraged" persons have the accumulated wealth (or a highly compensated spouse/lover) to just chill until the job market improves to the point where they can obtain the type of employment they prefer as opposed to a job to maintain themselves.

Under this view, those who are both "discouraged" and financially secure are to be celebrated: they are strong enough and financially able to resist working at just a job. Instead they prefer to wait for the opportunity to work at their advocation. This could just as well be a feature of a wealthy society that values work in a preferential way. How do economists and statisticians account for people of this status and persuasion?

Posted by: Lawrence on January 11, 2004 11:17 AM

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"There was no productivity boom in the US in the last two decades of the 20th century; there was an import boom that came with productivity fallouts." - Asia Times

Flibbity jibbity.
Nonsense nonsense.

Posted by: anne on January 11, 2004 11:28 AM

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Maybe you make too much of the plight of those "discouraged" persons who are not counted in the official unemployment rate. By what means do such people maintain themselves if they are not seeking work and can apparently afford to just chill out for a while? Maybe many of these "discouraged" persons have the accumulated wealth (or a highly compensated spouse/lover) to just chill until the job market improves to the point where they can obtain the type of employment they prefer as opposed to a job to maintain themselves.

Under this view, those who are both "discouraged" and financially secure are to be celebrated: they are strong enough and financially able to resist working at just a job. Instead they prefer to wait for the opportunity to work at their advocation. This could just as well be a feature of a wealthy society that values work in a preferential way. How do economists and statisticians account for people of this status and persuasion?

Posted by: Lawrence on January 11, 2004 11:29 AM

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Lawrence

We are a wealthy society and there are people who have lost jobs and will not work till the opportunity is right for them, but that is not the problem. The problem is middle class households are slowly being squeezed by loss of jobs or lack of job creation, by slight wage increases and benefit limits. Middle class savings have been slowly falling for years, though increases in home values may cushion a household.

We have a real problem of loss of labor demand and loss of labor wage and benefit leverage. There are those who are not efected, still the problem is there and growing.

Posted by: anne on January 11, 2004 11:39 AM

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Bulent, the way I would like to see this reported is "In December, some 309,000 people left the workforce. Of those who are either employed or actively looking for work, some 5.7% are unemployed". Which says concisely. So--why don't we see this reported this way?

Marc, I think W. Bush is a skillful, rather nasty, con-man without much executive skill. This isn't what is usually called "intelligence", and he'd probably be a miserable failure in life without family money and connections. As front man for a political team, though--"head of state" to Cheney's chief executive--he's pretty good. This may be the future of US politics; the skills that make a good chief executive have very little to do with presidential electability, these days.

Posted by: Randolph Fritz on January 11, 2004 02:20 PM

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Lawrence: "Maybe you make too much of the plight of those "discouraged" persons who are not counted in the official unemployment rate. By what means do such people maintain themselves if they are not seeking work and can apparently afford to just chill out for a while? ..."

I cannot help the term "welfare queen" coming to mind. No offense, I'm not saying you think along those lines, you are asking legitimate questions.

And no, the point is not whether they are in "plight", although you may consider that they may "maintain themselves" by "choosing" not to have health insurance, significantly scaling back on their lifestyle, saving less on the kids' college fund (where applicable), and living off of their savings that were intended for later in time (like when they planned to retire). For some people this may mean plight, for others not.

The purpose of measuring discouraged workers is to construct a meaningful labor market indicator in order to judge the state of the economy -- how many cannot find work at what they think they are good at.

Countering this by "they think they are too good to do lower jobs" or "if they need the money they should consider accepting lower-paid jobs in their field" is besides the point, while perhaps valid in many cases.

The normal state of an economy is that goods and services are exchanged at "fair" terms. Now what is "fair" depends a lot on cultural context and individual judgement, but a large number of discouraged workers indicates people who either think they cannot find employment at "fair" terms, or who think they cannot find any job that earns them positive income whatsoever (consider that going to a job and even looking for one carries a cost -- you have to burn gas or pay bus tickets, eat at food places at higher expense, you have to forgive unemployment or other benefits, arrange and pay for child care, etc.). Whatever the explanation, it indicates that the labor market is out of whack.

So much for the serious stuff, now on to rhetoric: if you were to lose your job (or can't find clients if self-employed) and the only "reasonable" alternative is flipping burgers at the stereotypical McDonalds or lowering your rate to such an extent that after cost you make something about minimum wage, are you going to go for it? Or are you going to "chill out", file for unemployment and rely on your "sugar-mama" in the hope that things get better?

It is always easy to talk tough about other people. No offense, please.

Posted by: cm on January 11, 2004 05:34 PM

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Steve Carr states that, "As for the specific passage that I asked Charles to clarify, the part that I think is wilfully confusing is this: 'blurs the all-important dividing line between debtor and creditor.' This seems to mean, as Liu goes on to say, that the U.S. is borrowing from itself. What does this mean?"

As an example, look to what is being done with Social Security. The money for the tax cuts came from what was needed to finance future need. Look to what is being done with pensions in general, as unfunded liabilities are created through accounting legerdemain.

He adds, "If I'm going to buy a house, and instead of taking out a loan I dip into my savings to pay for the house, I suppose you could say I'm borrowing from myself, but I don't see how this is a problem."

It's not a problem because the bank adjusts the balance to reflect the change in savings. In the case of Social Security, there is no bank to say, "Wait a minute! You can't spend the money on tax cuts because it's already promised to your elderly."

He adds, "'Securitization of debt' does not mean, at least not in any conventional sense of the phrase, "that normal debt is converted by complicated financial games into securities that no one really understands."

Far be it from me to be too obvious, but "securitization" means "to convert into securities." Debt can be carried in plenty of ways, including simply as a ledger entry. This would have been the normal way to deal with the Special Purpose Entitities that Enron created. But because Enron was not engaged in normal finances, it needed to created securities that no one understood. And this is what Liu is talking about.

Steve Carr adds, "As for Enron, I'd like a concrete example of the company "relabeling a liability as an asset." Enron did a lot of shuffling liabilities off its balance sheet by setting up special-purpose entities, etc. But the whole point of Enron's strategy was to get rid of assets -- "asset-light" was Skilling's mantra. So relabeling liabilities as assets would hardly have been something he was anxious to do."

To anyone who knows even Accounting 101, Skilling's mantra was obvious nonsense. How else does one create shareholder equity except by creating assets or reducing liabilities?

The accountancy issues were explained to me some years ago. I am not as skilled as the fellow who did the explaining, but let me try:

Let's say I want to build a house. Instead of taking out a loan, I create a special purpose entity called UtwaterCo. whose charter is the construction of a home.

UtwaterCo goes to the bank and explains that by constructing a home, it will be able to reduce the cost of housing me by $10000 annually. Therefore, it can sell me the home at a profit, perhaps charging me my current rent less than $5000 to live in it. The projected revenue stream is an asset of sorts, one which can be securitized by a willfully blind bank. Thus, the bank is willing to issue UtwaterCo a loan for, shall we say $150,000, collateralized by the income stream.

UtwaterCo now has an asset, namely a home, on which it can borrow money.

Thus has a liability (a mortgage) been laundered into an asset. And I don't have any liability, since that's also held by UtwaterCo!

And, yes, it sounds absolutely ludicrous, but that's what Enron did.

Steve Carr adds, "The problem is that Liu is doing the very same thing Enron did: using pseudo-intelligent rhetoric and financial jargon to disguise an ultimately incoherent endeavor."

I think his English is shaky, but his reasoning is not. But you're welcome to your opinion.

Posted by: Charles on January 11, 2004 05:37 PM

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anne: re productivity fallout

I have not had the time to read the article yet, but what I read into the quoted piece is that a lot of the "productivity" came from, let's say, computer manufacturers buying cheap Asian components for $400, assembling them into systems for $100 a piece, gluing their logo on the front, selling it for $1000, and GDP price indexing then makes it something like $4000-5000. (That's grossly simplified, and numbers may be off wildly, but they illustrate my point.)

Don't you think this is to some extent what has happened?

Posted by: cm on January 11, 2004 05:45 PM

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Steve Carr, Charles: debt securitization

I agree to some part with Charles. Creating a security means creating an asset (that can be loaned against subsequently). However, in my layman's terminology, the security does not represent a debt, but a claim on somebody's future (!!) debt repayment, and as such is a genuine asset, that is something that has a value.

So borrowing against a debt security does not mean borrowing against debt, but against future income.
To some extent, the original debt claim is passed on to the creditor at which the security has been deposited as, well, security. Or the security is sold, in which case the income stream is genuinely reassigned.

All this is sound and fine (probabilistically) if the risk of the securities is properly evaluated. If let's say the security holder is an agency that is assumed to be backed by the government, the risk may be undervalued. In a private context, the risk may be misjudged or misrepresented.

There was a major construction-related scandal in Germany some ten years ago where a builder managed to get billions in loans based on doctoring the square footage and projected rent income of his projects. One large ingredient in the fraud was lack of due diligence at the overly, let's say aggressive, banks. Of course when push came to shove, the whole house of cards came crashing down. The guy's name was Schneider, he fled to the US, but was apprehended and extradicted. It was probably small news in the US.

Posted by: cm on January 11, 2004 06:19 PM

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Yeah, he's an idiot. But he doesn't believe that crap, he says what he's told. He doesn't understand it.

So lay off him. Badgering him will just make him cranky. And nobody likes a cranky World Leader.

Posted by: some dude on January 11, 2004 08:21 PM

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Charles, "securitization" does mean "conversion of debt into securities." It doesn't mean, at least not conventionally, "conversion of debt into securities that no one really understands."

Anyway, this is too esoteric for just about everyone, and I'm disagreeing with Liu, not with you. But I will point out one thing: in your explanation of the UtwaterCo scheme, it is UtwaterCo (that is, the special purpose entity) that has the "asset," not you. And the outside investors -- if, in this story, you're analogous to Enron -- don't know that you have the asset, so you haven't converted a liability into an asset. In fact, you didn't have a liability before -- it was only created when UtwaterCo built the home. Also, UtwaterCo does have an inarguable liability -- the mortgage. In fact, I really don't understand how the story you told would look any different if you'd gotten a mortgage to build a house and then took out a home equity loan on the house (borrowed on the house).

Posted by: Steve Carr on January 11, 2004 10:15 PM

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Charles, your storey has a prob. Steve Carr said it - I will say it in a bit more detail. UtwaterCo can tell the bank that it is going to sell you the house it is building. The bank may advance it some money to build the house it will sell to you. The money will be paid for the land, work and materials on the house so neither UtwaterCo nor you personally have it by the time the house is built. So now UtwaterCo has the house (asset) and the liablity (loan). The value of UtwaterCo is the difference between one and the other, basically zero. You buy the house - you get the asset and you assume the liability, with the value of UtwaterCo still zero. Whether you pay a lump sum or in installments does not change anything. The bank can carry the loan on the books or resell it to someone (Funny Mae) that will pool the loans and produce securities (securitization). I hope this makes it clear.

Posted by: Leopold on January 12, 2004 01:03 AM

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The argument that there was no productivity boom in the US is nonsense. Productivity is calculated by taking the production numbers from the GDP accounts and dividing it by hours worked.
But the production data factors out the international side of the equation and just measures domestic production. Indirectly, the international does contribute but it comes about because typically it will be the least productive
jobs that will be exported.

I just looked at the 3 million job loss since the peak. manuf was 2.4 million and out of that total
0.5 million was in high tech manuf. In addition I estimate that roughly another 0.5 m high tech jobs were lost -- roughly 0.3 in info services and another 0.2 m in computer system design and related services. So high tech accounted for about 1 million or one-third of
the job loss with the other two-thirds in
traditional manufacturing. this estimate of high teck employment fell from a peak of 5.1 million
in March 2001 to 4.6 in March 2002, and 4.1 m now. So over half of the job losses occured in the first year of the downturn.

This data estimate shows that HT employment fell about 141,000 from Dec 2002 to Dec 2003. Out of this 90,000 was in manufacturing and 48,000 in non-manuf. This 48,000 is a first brush, back of the envelope calculation that probably represent an upper limit for the impact of outsourcing in the US economy. From December 2002 to december 2003 total manufacturing employment fell 2,440,000 -- 2,350,000 non-HT and 90,000 HT .
so you are looking at 2.35 million job loss in traditional manuf and 150,000 in high tech. Over the past year private sector jobs - using the survey not household data -- growth was essntially flat from 108,642,000 last year to 108,656,000 this year- within the stats margin of error.

I want to repeat that the 48,000 non manuf high
tech job loss in 2003 represents an upper limit for the impact of outsourcing. A significant
portion of that number may be from normal productivity . But this still accounts for less than 0.1% of total private sector employment--
with the margin of error for the data.

I know I am giving this info to people who are impacted severly by outsourcing, but because you are one most severly impacted you are the ones least able to look at it objectively. It is like a housefire. You hear on the morning news that a 3 decker in Boston burned and soon forget it. Unless it is a very unusual fire the police and fireman fighting it will tend to forget it in a few weeks.But the family living there will never forget it and it will impact them for the rest of their lives. I had a housefire once and have been laid-off a couple of times, and know it is very hard to be objective when it is your life being damaged.
A business economist job is highly expendable.

Posted by: spencer on January 12, 2004 07:47 AM

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cm says, "However, in my layman's terminology, the security does not represent a debt, but a claim on somebody's future (!!) debt repayment, and as such is a genuine asset, that is something that has a value."

The term is vague enough that one must say the definition is broader than "a claim on future debt repayment." To take a textbook definition, from Stickney and Weill, it is a "Document that indicates ownership", with examples of stocks, bonds and options or warrants.

"Ownership" implies that there is an underlying asset. Things are called "assets" because they provide "probable future economic benefits" (Stickney&Weill), so *if* someone has incurred debt in order to create the asset, your definition would hold.

>>If let's say the security holder is an agency that is assumed to be backed by the government, the risk may be undervalued. In a private context, the risk may be misjudged or misrepresented.<<

Yes. Ultimately valuation is where the problems come in,

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Steve Carr says, "Charles, 'securitization' does mean 'conversion of debt into securities.' It doesn't mean, at least not conventionally, "conversion of debt into securities that no one really understands."

And so it seems to me you're criticizing Liu's English, not his thinking. Securitization has no index entry in Stickney and Weill, a standard text on financial accounting, so being too prickly about its precise meaning doesn't make sense, at least not to me. I certainly understood Liu and feel that the meaning of obscurity of the instrument is obvious from context. Your mileage may vary.

He adds, "But I will point out one thing: in your explanation of the UtwaterCo scheme, it is UtwaterCo (that is, the special purpose entity) that has the "asset," not you."

That depends on whether I want UtwaterCo to hold the asset on its books or whether I want to move it to mine. If I want to move it to mine, I could hold equity ownership of UtwaterCo. Or, I could have structured the transaction such that UtwaterCo, in consideration of my assistance in arranging the transaction issued a note promising repayment of a sum less than or equal to that of the asset. I could even wait until after the bank has closed on the loan and hire me as a consultant for a sum less than or equal to the asset to make the payoff.

Steve Carr adds, "And the outside investors -- if, in this story, you're analogous to Enron -- don't know that you have the asset, so you haven't converted a liability into an asset."

(a) It does not make sense to say that if outside investors do not know of the existence of an asset, the asset does not exist; *most* outside investors have no clue what assets a company holds, and therefore, (b) in the example, it doesn't matter whether the outside investors know or not.

He adds, "In fact, you didn't have a liability before -- it was only created when UtwaterCo built the home. Also, UtwaterCo does have an inarguable liability -- the mortgage."

The liability, i.e., the loan, is balanced by a false asset, i.e. the rent stream. UtwaterCo has no net liability. But, if the bank were mad enough to agree to this scheme, UtwaterCo t would have an additional asset: the house, free and clear.

Remember that the conversion of a liability into an asset is a criminal activity. When closely examined, it cannot make sense, any more than a burglar's claim on your wealth can be said to make sense.

The trick that Enron played was in misestimating the value of cash flows. In the example that I gave, the imputed interest rate is roughly 3%. But a realistic imputed interest rate would perhaps be 15. At that point, it would be very obvious that the business plan was unworkable.

______________________


Leopold says, "UtwaterCo can tell the bank that it is going to sell you the house it is building. The bank may advance it some money to build the house it will sell to you. The money will be paid for the land, work and materials on the house so neither UtwaterCo nor you personally have it by the time the house is built. So now UtwaterCo has the house (asset) and the liablity (loan). The value of UtwaterCo is the difference between one and the other, basically zero. You buy the house - you get the asset and you assume the liability, with the value of UtwaterCo still zero. "

You've misunderstood the example in a number of ways. (1) It's assumed that I am, in effect, renting the house from UtwaterCo. (2) No construction is required. (3) Under proper accounting, of course there could be no asset. Enron "created" an asset by improper accountancy. The purpose of the example was to show how the scheme worked, and fooled so many people who, like you, couldn't follow what shell the pea was under.

Posted by: Chatles on January 12, 2004 08:03 AM

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Both Bush and Snow seem to be taking the tack that this is all due to the rise in productivity, as though that mitigates the situation.

Posted by: BobNJ on January 12, 2004 09:14 AM

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Charles,
If there is no construction required, UtwaterCo must have bought the house from someone - the money still went elsewhere. If you are renting the house, UtwaterCo still owns it and has the liability. Its value is still the difference, that is, zero. In the rent case your payments will be used to discharge the obligation (and also affect house repairs etc.) If it overcharges you on the rent, it will have an asset in the difference between your inflated rent and the liability payments - out of your pocket.
If you have your own real estate, you might see something called "rent potential" on your appraisal. It is imprecise, but it is always lower than your monthly mortgage payment.
If you want to use an argument that Enron's accounting was improper it might be a good idea to read the materials and not rely on foggy arguments and faulty examples.

Posted by: Leopold on January 12, 2004 09:25 AM

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Charles, how can you say "no construction is required," when your original example began "Let's say I want to build a house"? And if no construction is required, where did the house -- which you say Utwater owns "free and clear" -- come from?

You say that since Utwater's liability to the bank -- that is, the undeniable mortgage it has taken out -- is balanced by the rent revenue stream, it has no "net liability" (plus it owns the house). But if the revenue stream is false, how does it have no net liability. The fact that the loan is collateralized by the false revenue stream doesn't mean that the loan stops existing. Utwater still owes the bank $150K. It has not converted or relabeled a liability as an asset. Again, borrowing against an asset that you only part-own -- as with a home-equity loan or a second mortgage -- is not a radical or novel concept, regardless of what Henry Liu may think. And it is not, in any case, what Enron was doing.

You should read, if you haven't already, Maclean and Elkind's book on the company, as well as the Powers Report (which I'm sure you have read). I think you are actually making what Enron did more ocmplicated than it really was. Enron never escaped its liabilities: the reason the house of cards came crashing down was precisely that its lenders -- and the outside shareholders in the SPEs -- called in their debts when Enron's stock price fell below certain triggers and when its credit rating was slashed. And most of the SPE shenanigans were not really about borrowing against debt. They were about using Enron stock to capitalize and fund theoretically independent outside entities that were in fact controlled by Fastow. A startlingly large percentage of Enron's business in the last couple years of its existence just involved "trading" between Enron and the SPEs. The SPEs had "real" assets -- funding from outside investors and Enron stock. But when Enron's stock tanked, so too did the SPEs.

Posted by: Steve Carr on January 12, 2004 12:14 PM

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