See you in September

Some random thoughts on today's news stories:

Gold May Break Out to Record, Grabham Says: Technical Analysis (from Bloomberg.com):
This may include the worst analysis of anything I have read lately. The article begins with:

Gold may advance to a record $1,325 an ounce if it first breaks out of a symmetrical, triangular pattern, a move that may occur in the next one or two weeks, Standard Bank Group Ltd. said, citing trading patterns.

A so-called topside breakout would be indicated by a close at more than $980.85 an ounce, Darran Grabham, the bank’s technical analyst, wrote in a note yesterday. That would signal a short-term bull trend to at least $1,100 an ounce, he said.

Unfortunately, the article reports that Grabham goes on to say:

"...gold may tumble if it declines to less than the support trendline at $935 an ounce, Grabham wrote. “The ensuing sell-off is likely to encounter support around the $906.50 level, before a break lower yields a move to a secondary objective of $890,” he added.

“The minimum target of the triangle is highlighted at $850, with potential for the bear trend to test the corrective low recorded in January,” he wrote.

In summary, Grabham said that gold prices may go up, or gold prices may go down. Brilliant!

Fire Near Los Angeles Spreads in Triple-Digit Heat (from the Wall Street Journal):
Don't we do this every year?

The fact that California likes to protect it's wooded areas from development, keeping them off-limits to zoning, doesn't help. Yes, let us save Bambi, and ignore the fact we are putting thousands of homes and lives at risk. Let's not forget the economic costs of all the annual firefighting operations on an already overextended state budget.

Environmental stupidity at it's finest.

Daily Presidential Tracking Poll (from Rasmussen Reports):
So now Obama's approval rating is down to 45%. At this point, is it safe to add health care to Social Security as "third rails of American politics"?

Go ahead Barack. Keep pushing the health care idea...

WHEN ECONOMISTS ATTACK!
If you don't follow Greg Mankiw or Paul Krugman, you can skip this item. But for those of you who find econo-political debates fascinating...

The latest round between these two economists (in Krugman's case, I use the label "economist" VERY loosely) started Friday when Mankiw posted the following on his blog: "The Least Surprising Correlation of All Time"

Krugman countered with the standard elitist condescension towards the poor, poor, pitiful poor on his blog: "Heredity, environment, justice"

Mankiw counters twice: "And I thought I was being boring" and "Test Scores and Biological Father's Income"
Mankiw is correct in stating that intelligent people, who tend to be wealthier, tend to have more intelligent offspring. The macro data supports his view. Using SAT data broken out by parent's income (as Mankiw does) is a more objective criteria than using college graduation data broken out by parent's income (as Krugman does), since there are fewer external variables to account for in SAT scores. It takes several hours to take the SAT, versus the roughly four years it takes to graduate from college.

Aside from college graduation containing too many variables to be objective, Krugman's example given also has a significant flaw in it: The scores used to determine objective intelligence are 8th grade math scores. This would be fine if all college degrees were based on mathematical ability, but what about other non-math degrees, such as English or History?

With that said, I will admit that I don't reject Krugman's premise entirely. It is certainly possible, and maybe even probable, that children of low income parents who are less intelligent might be less likely to finish college due to financial reasons. But I would think that is because college is more likely to be quite difficult for them, both intellectually and financially. On the other hand, unintelligent wealthy children would only have to face the intellectual hardship of college (even then, only 30% of them graduate, according to the Economic Policy Institute study referenced by Krugman).

The question Krugman fails to ask: Do we REALLY want stupid people graduating from college?

Europe beats Krugman

Remember the good old days, when liberals/socialists/Democrats used to use Europe as the example of what we should or should not do?

Recently, as Europe has been moving to the right economically, prominent leftist economists have been moving away from their unbridled adulation of Europe.

In today's Wall Street Journal, columnist James Taranto basically feeds some crow to Nobel Prize-winning economist Paul Krugman (I never get tired of pointing out how great the Left thinks he is), using nothing more than Krugman's own writing in the New York Times, combined with one of their own stories:

-"There's a problem: conservative politicians, clinging to an out-of-date ideology--and, perhaps, betting (wrongly) that their constituents are relatively well positioned to ride out the storm--are standing in the way of action. No, I'm not talking about Bob Corker, the Senator from Nissan--I mean Tennessee--and his fellow Republicans. . . . I am, instead, talking about Angela Merkel, the German chancellor, and her economic officials, who have become the biggest obstacles to a much-needed European rescue plan."--former Enron adviser Paul Krugman, New York Times, Dec. 15, 2008
-"Why is Europe falling short? Poor leadership is part of the story. European banking officials, who completely missed the depth of the crisis, still seem weirdly complacent. And to hear anything in America comparable to the know-nothing diatribes of Germany's finance minister you have to listen to, well, Republicans."--Krugman, New York Times, March 16, 2009
-"The European economy bounced back with unexpected strength in the second quarter, buoying hopes that a worldwide recession was drawing to a close. The sharp improvement from the first quarter underscored just how far Europe and indeed the global economy had come since a harrowing free fall in late 2008. Underlying the strong reading were solid performances in France and Germany, each of whose economies grew slightly in the second quarter, according to government data released Thursday."--news story, New York Times, Aug. 14, 2009

Of course, this is not the first time Krugman has made a bad economic analysis, or said something incredibly stupid.

Appalling Krugman

As detailed in my post from Tuesday, Nobel Prize winning economist Paul Krugman was caught calling for the housing bubble which contributed heavily to our current economic mess. Then he tried to back off what he said by calling it "just economic analysis".

Now PhD economist Mark Thornton calls Krugman out for recommending the interest rate cuts which also contributed to this mess. The following Krugman quote from May 2, 2001, shoots a huge hole in Krugman's excuse (bold formatting added by me):

I've always favored the let-bygones-be-bygones view over the crime-and-punishment view. That is, I've always believed that a speculative bubble need not lead to a recession, as long as interest rates are cut quickly enough to stimulate alternative investments. But I had to face the fact that speculative bubbles usually are followed by recessions. My excuse has been that this was because the policy makers moved too slowly -- that central banks were typically too slow to cut interest rates in the face of a burst bubble, giving the downturn time to build up a lot of momentum. That was why I, like many others, was frustrated at the smallish cut at the last Federal Open Market Committee meeting: I was pretty sure that Alan Greenspan had the tools to prevent a disastrous recession, but worried that he might be getting behind the curve.

However, let's give credit where credit is due: Mr. Greenspan has cut rates since then. And while some of us may have been urging him to move even faster, the Fed's four interest-rate cuts since the slowdown became apparent represent an unusually aggressive response by historical standards. It's still not clear that Mr. Greenspan has caught up with the curve -- let's have at least one more rate cut, please -- but the interest-rate cuts do, cross your fingers, seem to be having an effect.

If we succeed in avoiding recession, this will mark a big win for let- bygones-be-bygones, and a big loss for crime-and-punishment. And that will be very good news not just for this business cycle, but for business cycles to come.

Read the rest of Thornton's post for more "tastes like crow" Krugman quotes.

What I find interesting is the last paragraph from Krugman's quote:

For the big lesson of the late 1990's was that speculative bubbles spring eternal. The signs of irrational exuberance, not to mention sheer silliness, were there for all to see; yet the bubble expanded — and then burst — all the same. Surely there will be other bubbles, and other burstings, in the decades ahead. The best we can hope for is that when the bubbles burst the consequences can be limited. And the faint signs of good news in the U.S. economy are reason to hope that they can.

Contrast that with Krugman's view from his May 27, 2005 column:

The important point to remember is that the bursting of the stock market bubble hurt lots of people - not just those who bought stocks near their peak. By the summer of 2003, private-sector employment was three million below its 2001 peak. And the job losses would have been much worse if the stock bubble hadn't been quickly replaced with a housing bubble.

So what happens if the housing bubble bursts? It will be the same thing all over again, unless the Fed can find something to take its place. And it's hard to imagine what that might be. After all, the Fed's ability to manage the economy mainly comes from its ability to create booms and busts in the housing market. If housing enters a post-bubble slump, what's left?

Mr. Roach believes that the Fed's apparent success after 2001 was an illusion, that it simply piled up trouble for the future. I hope he's wrong. But the Fed does seem to be running out of bubbles.

So after 4 years of pulling for interest rate cuts and housing bubbles, Krugman FINALLY started to see the problem with bubbles?

But the question remains: Was Krugman's "hope" that the bubble was not just an illusion based on his desire for the economy to work, or was it based on the fact that Krugman had spent years advocating the failed policies which were about to lead to disaster?

Nobel Lariat

I have picked on Nobel Prize winner Paul Krugman before, but when I read his idea for solving our recession back in 2002, I was floored by the complete idiocy of it.

What could be the worst possible advice anyone could suggest in 2002 to fight the recession? Maybe create a housing bubble? But that is exactly what our Nobel Prize winning economic baboon suggested:

To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that... Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

(from Krugman's August 2, 2002 New York Times column)

So how is that housing bubble working for you?

If Krugman had an ounce of honor, he would give back his Nobel Prize, then go pull a David Carradine somewhere.

(Hat tip to lewrockwell.com)

UPDATE: Krugman's response:

One of the funny aspects of being a somewhat, um, forceful writer is that I’m regularly accused of all sorts of villainy. I was personally responsible for the demise of Enron; my nonexistent son worked for Hillary; etc.. The latest seems to be that I called for the creation of a housing bubble — in fact, the bubble is my fault! The claim seems to be based on this piece.

Guys, read it again. It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.

My only problem with Krugman's explanation is that nowhere in the original piece does he suggest that a housing bubble would be a bad idea.

And the little joke about the housing bubble being his fault? Nice touch, but nobody is saying that. We are just calling you on the carpet for being on the wrong side of history yet again.

"Econoblogger" Megan McArdle says it best: "...there's a paragraph I'm sure glad I didn't write."

Krugman's flawed thinking

Paul Krugman, the Nobel Prize-winning and liberal-minded economist, has just enough facts to support his views, but then trips up his own points with his own flawed liberal worldview.

His New York Times editorial today is a good case in point. While he makes some good points against inflation looming on the horizon, he also shows how his own liberal bias influences his thinking:

But it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy.

I would expect a "respected" economist like Mr. Krugman would realize that federal tax revenues went up during the period of President Bush's tax cuts (once more providing the truth of the Laffer Curve). Assuming Krugman is referring to the economists I think he means, rather than just making a political strawman point, those economists were appropriately, and accurately, deriding the government spending which was creating the deficits.

For a Nobel Prize-winning economist to make such a blatantly political statement, and one which is wrong on top of it, is disturbing, especially in what is essentially a well-argued opinion piece.