Annals of the Great Recession XV.

The TARP and the stimulus bill were intended to recover from the financial crisis of 2008-2009.  What about preventing a re-run in the future?  The Dodd-Frank Act required banks to hold larger capital reserves and to submit to “stress tests” to evaluate how well they could deal with a future financial crisis on the scale of 2008.   Curiously, the law also limited the trade in “credit default swaps.”  Admittedly, the wholesale trade in these insurance policies against a collapse of the bubble seems to have been what sunk the AIG insurance group.  On the other hand, they were an investment by people who saw the bubble for what it was rather than blindly believing what they were told.

One effect of the new legislation appears to be that it has encouraged the consolidation of the banking system.  It has been argued that the costs of complying with the new regulations are more than smaller banks can bear, so they have sold out to already big banks that are better able to shoulder the burden.

It is said that generals are always preparing to fight the last war.  Banks and investors are on guard against sub-prime mortgages.  However, “bubbles” can develop in any asset.[1]  So, some kind of new crisis is always possible.  Can the government and the financial system respond effectively to a new crisis?  The answers are not encouraging.

First, a flight from Keynesian demand-management policies followed quickly on the financial crisis.  President Bush encountered considerable difficulty in getting Republicans to accept the TARP.  President Obama opted for a stimulus bill that Paul Krugman warned was half as big as it needed to be, spread over two years instead of front-loaded into one year, and contained a bunch of tax cuts that would be used to reduce debt instead of engaging in new spending.  Both Republicans and Democrats have proved critical of deficit spending plans.

Second, in the absence of a Keynesian policy on the part of the Congress and President, the Federal Reserve Bank launched a long program of “quantitative easing.”  It bought huge amounts of both MBSs and U.S. treasury debt as a way of pumping money into a slow-recovering economy.  It has only recently begun to unwind this position and to raise interest rates.  That means that it would be difficult to counter a new recession by cutting interest rates.

There may also be a deep hostility to government intervention on the part of many voters.  The policies that saved the American—and world—economy from a new Depression looked very much like a privatization of gains and a socialization of losses.[2]  Thus, in 2007, the top 10 percent of income-earners held 71 percent of the nation’s wealth; now the top 10 percent hold 77 percent.  That is about an 8 percent increase.  The Fed’s quantitative easing pushed up asset prices when ownership of stocks and bonds is concentrated in the upper income groups.

In 2007, the bottom 90 percent of earners held 29 percent of the nation’s wealth; today the bottom 90 percent hold 23 percent.  That is an average 20 percent drop in assets for the vast majority of Americans.  Even so, it is worse for some than for others.  Back in 2007, the median lower-income family had about $18,000 in assets.  Today they have about $11,000 in assets.  Doubtless that fall largely represents the loss of the houses they bought without being able to pay for them.  Would Congress tolerate a new TARP or a new stimulus bill?

Maybe.  The combination of the recent tax revisions and the huge spending bill that enjoyed bipartisan support seem likely to massively expand the deficit.  Maybe stimulus is back in style if you put in enough treats for everyone.  Locking up a bunch of bankers might have to be one of those treats.

[1] See: Alexandre Dumas, The Black Tulip (1850).

[2] President Obama may have contributed to this with his denunciation of the rich as “the people who tanked the economy.”  Bill Gates and Warren Buffett tanked the economy?


Annals of the Great Recession XIV.

To review, the presidents from 1981 to 2017 were Ronald Reagan (1981-1989), George H.W. Bush (1989-1993), Bill Clinton (1993-2001), George W. Bush (2001-1009), and Barack Obama (2007-2017).  The chair-people of the Federal Reserve Bank were Alan Greenspan (1987-2006), Ben Bernanke (2006-2014), and Janet Yellin (2014-2018).  So, those are the people upon whose watch various things happened.[1]

Between 1997 and 2006 the government eased regulations on lending and encouraged home-ownership among new groups.[2]  Mortgage originators—banks or mortgage companies—did what they were allowed and even encouraged to do: they issued mortgages (loans) to “sub-prime” borrowers.[3]  These amounted to hundreds of billions of dollars of risky loans.  Rather than hold these dangerous loans on their own books, the loan originators re-packaged the mortgages as collateralized debt obligations (CDOs) and mortgage-backed securities (MBS), then sold these packages to investors.[4]  With many previously-excluded buyers seeking a limited stock of housing, housing prices rose by a national average of 124 percent.  The value of the CDOs and MBSs also rose.  Prices for both exceeded their real value.[5]

Then, in 2007 and 2008, it became apparent why sub-prime borrowers had previously had trouble getting loans.  The number of defaults started to rise sharply.  The MBSs and CDOs dropped toward their real value.  Financial institutions that had purchased these “instruments” suddenly found immense sums wiped off the asset side of their ledgers without their liabilities (what they owed other people) being reduced.  Bankruptcy loomed for the banks unless they could get rid of these dogs in a hurry and replace them with more valuable assets.  First Bear, Sterns, and then Lehman Brothers failed.  Seeking to stop the bleeding, banks pulled in the reins on all lending, including for productive investment.  The whole economy rapidly slowed during 2008.  The Dow Jones Industrial Average fell by 50 percent.  This reduced the values of many assets held by the upper and middle-classes, causing them to cut spending in order to reduce their own debts.  With consumption spending and investment both falling, the unemployment rate jumped to 10 percent by late 2009.

Acting quickly, the George W. Bush administration pushed through a Troubled Asset Relief Program (TARP) that bought $700 billion worth of bad debt from the banks.  The Obama administration launched a mini-Keynes stimulus program of $757 billion.  The Federal Reserve Bank cut interest rates to near zero and held them there for a long time.

[1] “The long shadow of the financial crisis,” The Week, 13 April 2018, p. 11.

[2] In part, this seems to have had a worthy purpose.  Houses are a key middle-class asset, but “red-lining” by banks had long restricted access to home purchases by African-Americans and other groups.  See:

[3] Sub-prime borrowers are ones with poor credit-worthiness.  For an explanation of how credit-worthiness is determined, see:  Very often, these are referred to in public discourse as “sub-prime loans,” as if the problem existed only with “predatory” lenders.  This seems to me to resemble referring to illegal immigrants as “un-documented immigrants,” as if the only problem is a bureaucratic foul-up with issuing them some documents.

[4] Apparently, it was possible for the purchasers to discern that the CDOs and MBSs were very risky—and possibly worthless—investments.  Most people did not do so.  A few did.  See: Gregory Zuckerman, The Greatest Trade Ever (2009) and Michael Lewis, The Big Short (2010).  The bets against the housing buble were called credit default swaps.

[5] This is called a “bubble.”

Head on Collusion

Adam Schiff says “collusion” and “conspiracy” are the same thing.  Apparently the law says different.  “Conspiracy” is “secret co-operation” of two more parties to commit a crime.  So, to prove a “conspiracy,” prosecutor Robert Mueller will need to show that the Trump campaign received something of “value” from the Russians.[1]  Those things of value might have included covertly-supplied (i.e. “laundered”) campaign contributions.   The “conspiracy” element also could include things like co-ordination of the release of the hacked Democratic National Committee (DNC) e-mails or guiding the Russian social media campaign.[2]

Beyond that, Mueller probably is trying to discover if an understanding existed in which the Russians helped candidate Donald Trump in return for a promise to pursue a policy more friendly to Russia by President if Donald Trump.  One key question appears to be whether anyone in the Trump campaign engaged in “intentional solicitation” for help or co-operation.

In July 2016, Trump publicly urged the Russians to “find” the 30,000 e-mails that Hillary Clinton had deleted from her personal e-mail server.  It seems clear from the story of George Papadopolous and from accounts of the June 2016 meeting between Russians and leaders of the Trump campaign (Donald Trump, Jr., Jared Kushner, Paul Manafort) that the Russians had claimed that they had “dirt” on Hillary Clinton.[3]  In August 2016, Roger Stone, a Trump adviser, told someone that he had met with Julian Assange, of Wikileaks.  He predicted that DNC official John Podesta soon would be in for a hard time.  Is having knowledge of something the same as participating in a conspiracy?

Michael Flynn, briefly Trump’s national security adviser, discussed economic sanctions with Russian ambassador Sergei Kislyak, then lied about the discussions to Vice-President Pence.  Michael Cohen, one of Trump’s personal attorneys and commonly described as a “fixer,” is alleged to have lied about a visit to Prague to confer with Russians.  Did he lie under oath or only to journalists?

It has been reported that Deputy Attorney General Rod Rosenstein told Trump in late April 2018 that he is a target neither of the Mueller investigation nor of the Michael Cohen investigation.[4]  Mueller has been at this for quite a while.  He has indicted George Papodopolous, Paul Manafort, Rick Gates, and Michael Flynn, while Michael Cohen has had his home and offices searched.  Is it really possible that he has found no proof of a crime by the president?  Found no one who will “flip” on the president?  Found nothing worth knowing from anyone who is willing to “flip” under the pressure of transgressions unrelated to the campaign?  Or is he just biding his time?

Liberals countered by arguing that “the opera ain’t over till the fat lady sings”: Trump could still become a target at any moment.  Many of their hopes seem to rest on a charge of obstruction of justice related to the firing of FBI Director James Comey.  Comey’s evident loathing of the President he was charged to investigate and a failure by Mueller to discover proof of a “conspiracy” could under-cut the validity of an obstruction charge.  In the court of public opinion, if not in the law courts.

[1] It seems apparent that the “Steele dossier” came from the Russian intelligence service with the intention of helping Hillary Clinton.  So why isn’t the Clinton campaign also under investigation?

[2] “The collusion question,” The Week, 4 May 2018, p. 11.

[3] Clearly they did have some embarrassing materials.  These were released through Wikileaks in August 2016.  Did they have more and “even better” stuff that they held back to use as leverage if Clinton managed to win?

[4] “Giuliani seeks end to Russia probe,” The Week, 4 May 2018, p. 5.

Bill of Rights II.


The Articles of Confederation provided a poor sort of national government. The “United States” received scant respect either from foreign or state governments.  The men who authored the Constitution were determined to correct this fault.  However, they knew that the great majority of Americans feared the power and ambition of any central government.  Like the British monarchy, even the most “liberal” government might become tyrannical.  For example, a government might seek to abolish slavery in the Southern states merely because a numerical majority found it abhorrent.

Consequently, James Madison designed a government based on the separation of powers.  The executive, the legislature, and the judiciary would be co-equal branches of government.  Each branch would work to hold in check the pretensions of any over-mighty individual branch.[1]

Some delegates to the constitutional convention in Philadelphia worried that these provisions did not go far enough in insuring individual liberty.  Elbridge Gerry and George Mason proposed addition of a bill of individual rights.  This was rejected.  Later, Richard Henry Lee proposed that a bill of individual rights be added to the Constitution.  This, too, failed.

James Madison had argued against any bill of rights.  He believed that such a bill would do no good against a “republican” government based on popular sovereignty.  That is, the “people” would brook no opposition from a minority.  Furthermore, a government might interpret a Bill of Rights as stating the maximum, rather than the minimum, liberties of the people.  However, during the ratification process it became apparent that many ordinary citizens shared the reservations of Gerry, Mason, and Lee.  Essentially, they believed that even the most “liberal” government might become tyrannical over time.  Madison had argued that no bill of rights need be included because the division of powers and the conflict between interest groups would hold tyranny at bay.  This argument failed to persuade many of his readers.  The promise to add a Bill of Rights then became a bargaining chip in the effort to persuade state conventions to ratify the Constitution.  Six states recommended that a Bill of Rights be adopted once the Constitution had come into effect.  There were only 13 states then, so…

Madison abandoned his opposition to a Bill of Rights.  He wrote his own.  He offered these to Congress in June 1789.  He proposed to splice-in Amendments One through Five within the Constitution itself in Article I, Section 9, between Clauses 3 and 4.   Clause 3 bans Bills of Attainder.  Clause 4 bans direct taxation except equally according to the census.  In short, Madison intended that the Bill of Rights be individual rights.

Added instead as an appendix to the Constitution, they were adopted by Congress and ratified by the required number of states by December 1791.  Critically, the Ninth Amendment stated that “The enumeration of certain rights shall not be construed to deny or disparage others retained by the people.”  In this way, Madison responded to his fear that a tyrannical government might treat a Bill of Rights as a maximum statement of the rights of individual citizens.

Subsequently, the courts, including the Supreme Court, held that the “right of the people” referred to the rights of individuals.  Freedom of religion is an individual right.  Freedom of speech is an individual right.  The freedom to petition for redress of grievances is an individual right.  The right to be safe from unreasonable search and seizure of papers is an individual right.  The right to not be compelled to testify against oneself in a court of law is an individual right.  The right to trial by an impartial jury is an individual right.  The right to not suffer cruel or unusual punishments is an individual right.  God save the United States of America.

[1] Although that left the danger that two branches might, for their individual reasons, gang-up on the third branch.

Bill of Rights I.

English people, including the Anglo-Americans, understood their history as the product of a bitter struggle between tyranny and freedom.  Stuart absolutism had sought to restrict the rights of Englishmen.  This led to the English Civil War, the execution of King Charles I, and the republican Protectorate.  The Stuarts had been restored in 1660, but had acknowledged the role of Parliament and the laws as guardians of the rights of Englishmen.  King James II (r. 1685-1688) had tried to tip the balance toward French-style absolutism during his brief reign.  This had triggered the Glorious Revolution of 1688, while the constitutional fruits of that revolution had been harvested by the terms of the Hanoverian Succession in 1714.

Britain’s American colonies, and New England in particular, were peopled by the descendants of anti-absolutist Englishmen of the mid-17th Century.  The Englishmen who did not migrate had fought the English Civil War and created the republican Protectorate government.  The two groups shared many ideas.  These ideas were in some respects, pre-Enlightenment, rather than Enlightenment ideas.  John Locke occupied a central position for both strains of thought.  Locke had argued that a “social contract” bound both governors and the governed.  If either party broke the contract, then the other party was not bound to comply with the terms of the contract.  A tyrannical ruler had no legitimate claim on the obedience of his subjects.

That fear of a strong central government had arisen from these earlier experiences.  In the 1760s, the Americans had still seen themselves as Overseas Englishmen.  They still possessed the rights of Englishmen.  Those rights, in their understanding, included the right to be taxed by their own elected representative and the right be tried by a jury of their peers.  Both of these rights had seemed threatened by new taxes imposed by a British parliament elected only by British voters and by the Admiralty Courts appointed by the Crown and operating without juries.  As early as the Stamp Act Crisis, a handful of Americans had seen the measures as the leading edge of an effort to subjugate the colonists to absolute government.

In these circumstances, resistance offered the best path to preserving existing freedoms.  Colonial legislatures had denied the right of Parliament to impose the Stamp Act, then organized boycotts of British goods, and worked-up mobs to intimidate potential stamp distributors.  The organizers of this violent intimidation then went on to create the Sons of Liberty as a continuing resource.

The threat of superior military force added another dimension.  Until the French and Indian War (1756-1763), Anglo-Americans had defended themselves—and occasionally made offensive war—through their militias.  These were call-ups of all able-bodied and self-armed men in every Middlesex village and farm.  Anglo-Americans associated “standing armies” with the expansion of absolutist/tyrannical government like that in France.  Paranoia added another dimension.  After the defeat of the French, the Quartering Act had required the colonists to house British soldiers.  If the foreign danger had passed, why did Britain need to keep troops in America?  Did the Crown intend to impose its will on its American colonists?

In September 1768, two regiments of British infantry were ordered to Boston to support collection of the Townshend Duties.  The “Boston Massacre” (1770) cemented American hostility to regular troops.  The “Boston Tea Party” (1773) demonstrated the uses of violence.   Then came Concord and Lexington (1775).  Then came the Revolutionary War.  In the minds of many Americans, the ultimate defense against tyranny lay in the ability to shoot back.

“Bump Stocks.”

The purchase of fully automatic weapons has been tightly restricted in the U.S. since the 1930s. Outlaws great and small used fully automatic weapons (machine guns and sub-machine guns) against rivals and against the police.[1]  The 1934 National Firearms Act narrowly restricted ownership of fully automatic weapons; a 1986 amendment prohibited most transfers or possession of automatic weapons, except those that had been manufactured and registered with the government in the past.[2]  It would appear that most privately-owned fully automatic weapons are in the possession of licensed gun-ranges.  You can go to a range, pay a daunting fee, and fire a fully automatic weapon at a paper target.  That’s enough for most gun-owners

Still, a small number of gun-owners yearned for the experience of firing a weapon on full-auto at a lower cost.  Then, some physically-disabled shooters wanted an adaptive technology that would allow them to enjoy one of their favorite pre-disability sports.  Admittedly, this is kind of a niche market.[3]  Numerous attempts to design retrofits for semi-automatic weapons failed.  Then, in 2008 or 2009, someone invented “bump stocks.”  The particular technology doesn’t seem to me to matter.  The effect does matter.  “Bump stocks” allowed shooters to “simulate” full automatic fire.[4]

In 2010, the Bureau of Alcohol, Tobacco, Firearms, and Explosives (commonly ATF) considered whether they violated federal law by creating a new form of fully automatic weapons.  ATF concluded that they did not violate federal legal restrictions on automatic weapons.  They did not alter the internal firing mechanism.  They just exploited it to achieve the same effect as a full-auto weapon.  So, “bump stocks” were good to go.  This was two years before the Sandy Hook Elementary School shootings.  In the wake of the Sandy Hook shootings, President Obama said he would “use whatever power this office holds” to prevent a new version of the massacre.  Alas, when he issued 23 Executive Orders in January 2013 to enhance gun-control, these did not include ordering ATF to revisit its approval of “bump stocks.”

Still, “bump stock”-modified weapons have problems.  First, they are Hell on accuracy.  Still if a sniper has 22,000 people penned inside a concert venue, s/he doesn’t need to be very accurate.  Anything within range can become a target.  Second, firing weapons designed to fire as semi-automatic on “simulated” full-auto generates more heat than the weapons are designed to handle.  They tend to jam.  So Stephen Paddock attached “bump stocks” to 12 of the rifles he brought to his room in the Mandalay Bay.[5]  It seems likely that he walked back and forth between the two windows he had broken whenever a weapon jammed, picking another off the bed on the way.

The obvious solution here is to revisit the 2010 ATF decision and declare “bump stocks” illegal.  That won’t do the casualties in Las Vegas any good, but it might help forestall mass shootings in the future.  Still, “mass shootings” as conventionally defined and long-guns (rifles and shotguns) account for a small share of the murders and suicides that still give America a high homicide rate.  Certainly, action on this front is needed.  It should not distract people from the much larger problem of hand-gun killings.  However, it will do just that.  For now.

[1] See: and

[2] Kind of like “legacy” admissions to Ivy League universities.  I don’t mean to suggest that they have equally harmful effects on American society.

[3] One Georgia gun-dealer judged that he had sold a couple in a couple of years.

[4] See:

[5] At maybe $200 each, that cost his about $2,400.

What if Hillary Clinton had won?

One can’t help but wonder what would be different if Hillary Clinton had won the Electoral College vote as well as the popular vote.  Some things are clear, others are hazy–to me anyway.

First, the Republicans would still hold the House and the Senate.  Nothing that President Clinton proposed would pass through Congress and nothing that the Republicans passed through Congress would be signed into law.  Thus, for at least two more years, we would be living with a continuation of the final six years of the Obama administration.  That is, President Clinton II would govern by executive orders and rule-changes by federal agencies.  These would be contested in the courts.

Second, the Republican Senate might well refuse to hold hearings on any Clinton nominee for the Supreme Court.  Thus, probably we would be living with a 4-4 deadlock on the Court.  The decisions of lower courts would be affirmed.  That would shift the judicial struggles to the nomination of judges to lower courts.

Third, both Bernie Sanders and Hillary Clinton had repudiated the Asia Pacific trade deal before the election.  It would be just as dead under a Clinton administration as it is under a Trump administration.

Fourth, James Comey would have been dismissed as Director of the Federal Bureau of Investigation.  Congress would then have held hearings on this matter, including on whether this amounted to obstruction of justice.  (See: Benghazi hearings if you don’t think that this last contention is true.)

Fifth, there would be an investigation of Russian meddling in the 2016 election.  This investigation would reveal—at the least—that the Russkies had hacked Democratic computers and the passed the fruits of this robbery to Wikileaks.  Moreover, the Russians would be revealed to have done a bunch of other things that may have monkeyed with the passions of voters.

Six, the Clinton campaign would have transitioned to government offices.  The results for American government would resemble those of the Clinton campaign itself.  According a New York Times review of the first account of the Clinton campaign organization, “It’s the story of a wildly dysfunctional and ‘spirit-crushing’ campaign that embraced a flawed strategy (based on flawed data) that failed, repeatedly, to correct course…In fact, the portrait of the Clinton campaign that emerges from these pages is that of a Titanic-like disaster: an epic fail made up of a series of perverse and often avoidable missteps by an out-of-touch candidate and her strife-ridden staff.”  These people would then have set out to manage the White House.  Then, what about Bill and Chelsea, and the Clinton Foundation, and Huma Abedin?

Seventh, Roy Moore would not have had the chance to defeat Luther Strange for a Senate seat from Alabama because Jeff Sessions would still be a sitting senator.

Eighth, the Clinton administration would be dealing with a series of long-developing, but now pullulating international crises: Iran’s nuclear weapons combined with its support for the Assad regime in Syria; North Korea’s nuclear threat; Russia’s intervention in a series of conflicts. European elections; and the Rohingya refugees.  So, a lot of ugly issues.

Ninth, the “exchanges” created by the Affordable Care Act (“ObamaCare”) were collapsing before the election.  Young people have declined to pay for their elders.  President Clinton would have had to seek a solution in league with a Republican Congress.  Under these circumstances, what would be the middle ground?