New Yorkers Suffer Collective Anxiety Disorder

Economic uncertainty has contributed to a 7 percent spike in prescriptions for sleep aids and 5 percent growth in anti-depressant and anti-anxiety drugs in New York City compared with a year earlier. The data are published by Crain’s New York and were collected by Wolters Kluwer Health, a global provider of medical information.

The spike was particularly evident in September, when an economic tsunami bankrupted Lehman Brothers Holdings Inc., forced Washington to bail out insurer American Insurance Group Inc., prompted Bank of America Corp. to rescue Merrill Lynch & Co., and led Goldman Sachs Group Inc. and Morgan Stanley to reorganize as bank holding companies.

“If we looked to diagnose the city, I would say it has an anxiety disorder,” said Mel Schwartz, a psychotherapist with practices in the city and in Westport, Conn.

The following link to a short video is not from the Crain’s article but provides advice for those who are suffering from Irritable Bailout Syndrome – see Doctor Decline.

Not My Dad's Fed

I went to work for the Fed in 1964, when William McChesney Martin, Jr. was Chairman. He would be surprised at the activism of today's Fed as it drops the equivalent of napalm on the dangerously frozen peaks of our financial landscape. Back then I was a financial economist in the Division of International Finance headed by Ralph Young, editor of the third edition of The Federal Reserve System: Purposes and Functions, 1954. (The first edition was drafted by the great Bray Hammond in 1939.)

The marble building at 21st and C Streets hasn't changed much since 1964. But three things definitely have - the link to gold, the size of Fed assets and the reach of the Fed into financial markets.

1. Link to gold broken. Back in 1964, the Treasury bought gold at a fixed price of $35 an ounce from private owners of gold, forbidden 30 years earlier from holding gold for speculative purposes. Purposes and Functions, 3rd edition says (97-99):

Gold is the ultimate basis of Federal Reserve credit and gold movements are an important factor in member bank use of Federal Reserve credit. The power of the Reserve Banks to create money is limited by the requirement of a 25 percent reserve in gold certificates against the total of deposits and issued Federal Reserve notes. All gold that enters the monetary mechanism becomes reserve money of the Federal Reserve Banks in the form of gold certificates. In practice most of their reserves are represented by a credit in a gold certificate account on the books of the Treasury.

The last connection between gold held by the Treasury and Federal Reserve Bank deposits was ended by President Nixon in 1971, under the pressure of the OPEC-led oil shortages. This also ended the gold standard and removed the cornerstone of the Bretton Woods system.

2. Increase in Federal Reserve assets. Fed assets from 1920 through 1953 are shown in Purposes and Functions, 3rd edition. They rose from $6 billion to $53 billion in 33 years.

Combined Assets, Federal Reserve Banks ($bil.), Year-End

Asset Category	1920	1930	1940	1953
Gold certificate reserves	2.06	2.94	19.69	21.34
U.S. Govt. securities	0.29	0.73	2.18	25.89
Discount loans to member banks	2.69	0.25	0.00	0.42
Subtotal	5.04	3.92	21.87	47.65
Other assets	1.21	1.28	1.28	5.18
Total	6.25	5.20	23.15	52.83

Source: CityEconomist based on data from The Federal Reserve System: Purposes and Functions, 3rd ed., 187.

Fast forward to November 2008. Fed assets were growly slowly toward the $1 trillion mark until the freeze hit and Fed assets (Reserve Bank credit) more than doubled from a year earlier, to $2.17 trillion as of December 3. The President of the Dallas Federal Reserve Bank opined in early November that Fed assets will reach $3 trillion by the end of 2008.

3. Market Operations

A "bills only" policy was abandoned in 1961, but a "bills preferably" goal still made sense because open market operations to pursue monetary policy are easiest to manage in the most liquid part of the market, the short end. In recent weeks, however, the Fed's efforts to defrost bank vaults have driven the return on Treasury bills to zero and the Fed has no choice but to operate at longer maturities.


Former Fed Governor Laurence Meyer is speaking to the New York Association for Business Economics on December 17. The title of his talk is: "Monetary Policy: Whatever It Takes." That says it all.

JOBS | Dismal News for U.S. Metro Areas

I posted this a few hours ago on Huffington Post. Unemployment tends to lower tax revenues to states and localities and raises expenditures, so it's one of the contributors to the fact that 41 states are facing budget gaps, some of them daunting.

When the Governors appealed to President-elect Obama for help today, they had support from today's Bureau of Labor Statistics release of dismal October unemployment data for metro areas.

Metro area unemployment rates (not seasonally adjusted) in October were above the October year-earlier rates in 361 metro areas and below in only eight. Unemployment rates exceeded 10 percent in 13 metro areas and were below 3 percent in 11. (The national unemployment rate in October rose to 6.1 percent from 4.4 percent a year earlier.

Unemployment exceeded 7 percent in 98 metro areas, increasing from 16 areas a year earlier. They were below 4 percent in 43 areas, a drop from 151 a year earlier. The highest unemployment was in El Centro, Calif., 27.6 percent. Next highest was in neighboring Yuma, Ariz., 19.5 percent. The lowest unemployment rate was in Bismarck, N.D., 2.2 percent. Next lowest: Logan, Utah-Idaho, at 2.4 percent.

Overall, 148 areas exceeded the U.S. average rate of 6.1 percent and 216 areas reported rates below the U.S. average. This suggests that metro areas on the whole remain better places to find jobs than rural areas.

El Centro, Calif., had the largest increase in unemployment from a year earlier, 6.8 percentage points. The next-highest increase was in Elkhart-Goshen, Ind., 6.3 points. A total of 33 areas had increases of 3 percentage points or more. Another 92 areas had increases of 2.0 to 2.9 points. Jonesboro, Ark., fell the most from a year earlier, -0.6 percentage point.

Of 49 metro areas with a 1 million or more population, Riverside-San Bernardino-Ontario, Calif. had the highest rate, 9.5 percent. Eight other large areas posted rates of 7 percent or more. The large area with the lowest rate was Washington-Arlington-Alexandria, D.C.-Va.-Md.-W.Va., 4.1 percent. Next lowest: Oklahoma City, Okla., 4.2 percent.

All 49 large areas registered higher unemployment rates than a year earlier. The area with the largest increase was Providence-Fall River-Warwick, R.I.-Mass. (+3.8 percentage points). Next largest: Riverside-San Bernardino-Ontario, Calif. (+3.2 points). Fourteen other large areas had rate increases of 2 percentage points or more, and 29 other areas had rate increases of at least 1 point.

TRANSITIONS | Lessons for Obama

Nov. 27, 2008–I was dipping back into a book by Carl M. Brauer, Presidential Transitions: Eisenhower through Reagan (Oxford University Press, 1986) and found much information that might be useful to the Obama transition. The last chapter, "Conclusions: Historical Patterns and Lessons," concentrates all the book's earlier stories and comparisons into a dense guide for any transition staff that has time to look up from the resumes they are reviewing.

Here's one rule Brauer gleans from all of the transitions his book covers:

Relations between outgoing and incoming Presidential administrations have usually been civil... but rarely productive or educational (p. 258).

A common experience is for outgoing staff to prepare themselves for a debriefing, never to be asked for it. I know that in New York City many a briefing book for the next administration has been unopened.

Instead of gleaning as much information as possible from the outgoing administration at every level, incoming Presidents

frequently overreact to a perceived flaw in their predecessor. In reaction to Truman, Eisenhower was too anti-political. In reaction to Eisenhower, Kennedy was too anti-organizational. In reaction to Nixon, Carter was too "anti-imperial." In reaction to Carter, Reagan was too ideological.

Nixon did not overreact in this way, but he did not foresee, says Brauer, how Johnson's war in Vietnam would become his war. This illustrates a general point that

new Presidents and those around them, buoyed by their recent electoral victory, tend to believe that bad things cannot happen to them. But bad things do happen. Some Presidents are reelected, but all Presidents leave office with significant amounts of scar tissue... [A]ll Presidents have made decisions at the start of their administrations that they later regarded as serious mistakes or should have so regarded (p. 258).

Brauer believes that Presidents need to damp down "excessive optimism" and too much faith in the potential from "organizational reform".

DoD Retirees Slam Waste, Errors

Read the stunning new book from the Center for Defense Information (CDI) on the budgeting weaknesses and strategic blunders of the DoD. It's a remarkably good read as well as offering a buffet of common-sense reforms for the new President and Congress.

Rep. Barney Frank has already called for a 25 percent cut in the military budget. That may be hard to do right away because of the overstretched troops in Iraq and Afghanistan, but the new book shows lots of ways that the out-of-control military budget can be reined in for more security at less cost.

The book, America's Defense Meltdown: Pentagon Reform for President Obama and the New Congress, is out just two weeks after the election, exemplifying one of the themes that runs through it, namely the importance of speed and the ponderous nature of our military organization, which is critiqued as stuck in the second generation of four generations of warfare. The eleven chapters of the book are written by 13 retired Pentagon insiders, retired military officers and defense specialists. The book is edited by Winslow T. Wheeler (photo at left), Director of CDI's Straus Military Reform Project. CDI has itself found a home in the World Security Institute. Wheeler worked for 31 years for U.S. Senators from both political parties and the Government Accountability Office. His earlier book, The Wastrels of Defense, was published by the U.S. Naval Institute Press.

The book (a 2.3 meg pdf file) can be read for time being online at http://tinyurl.com/6ylwfw. I have been up most of the night reading it - it is fascinating.

The scope of the first chapter by Lt. Col. John Sayers (U.S. Marine Corps, ret.) is global and deeply rooted in history. He observes that for most of human history wars have been fought in first-generation mode, with independently assembled military units engaged in close order drills. The Thirty Years War, largely a battle between Catholics and Protestants, led to the 1648 Treaty of Westphalia, which ushered in the era of the dominance of nation states.

The second generation of warfare began at the end of the 19th century with the rivalry between Germany and Britain. The industrialized states were able to raise their firepower and support large battalions. This was the mode of battle of World War I, a war of attrition in Europe that was disastrous for all the combatants (the United States came late to the war and still lost 250,000 troops in Europe - while the major powers in Europe lost many more).

Already at the end of World War I, with their forces depleted, the Germans were trying a third generation of warfare, decentralized and maneuverable. Sayers says that this approach was used by the Germans effectively in World War II and was imitated by the Chinese in Korea and by the Viet Cong.

Nowadays, we are engaged largely in a fourth-generation war. With a loss of nation-state controls in many parts of the world, independent paramilitary groups have arisen, such as FARC in Colombia, or al Qaeda, or the Chechen rebels in Russia. Parts of Iraq are controlled by independent Sunni, Shiite and Kurdish forces. It's a reversion to the days before the Treaty of Westphalia. The independent groups behave the way SPECTRE does in the Ian Fleming novels - they have specific objectives and they fight to achieve them.

Sayers says we should have moved a long time ago to third-generation and fourth-generation readiness - with smaller and more maneuverable forces. He does not think the large nations have any interest in another war of attrition of the size that the United States prepared for during the Cold War.

Why has the United States been stuck in a century-old military strategy, spending too much money for too little ability to wage a modern war? Here are some of the reasons he advances:

- Budget gaming - frontloading and political engineering of weapons systems (Gordon Adams wrote about this 30 years ago in The Iron Triangle), with the result that the weapons are too big, too complex and unreliable.
- U.S. military forces are led by officers who are inadequately trained to lead, contributing to tbe unpreparedness of the troops.
- Defense costs rise faster than defense budgets and have become "ruinously expensive." Sayers ends the chapter describing the U.S. military creature as a "weak-muscled elephant that cannot even deal effectively with mice."

The other ten chapters go on in the same vein, urging reassessment of the way that war-making decisions are made, the military personnel system, overdependence on foreign bases, lack of mobility of forces on sea and land, overdependence on technicians, excessive faith in the value of strategic bombing as opposed to air-to-air and close-support operations, misuse of the National Guard for overseas duty, excessive faith in technology and inadequate tracking of defense spending.

Read the book! Here's the link again to the free online file while it works: http://tinyurl.com/6ylwfw.

EPS | Iraq Is a Hard Place

Nov. 15, 2008–Yesterday evening Economics Nobel Laureate Joseph Stiglitz painted a picture of today's dire economic straits with a broad brush, putting the burdens of the Iraq War in the middle and detailing the finer points of Bush-era economic failures around the sides. The canvas was made less miserable to observe by the fine food and wine served in the comfortable Upper East Side Manhattan home of Alan and Catherine Harper, at a fundraiser for Economists for Peace and Security (EPS).

Joe Stiglitz is introduced by EPS Chair Jamie Galbraith. The room is full and buzzing. CityEconomist is in the first of three rows of chairs facing our speaker. Jamie, son of much-missed EPS leader John Kenneth Galbraith, is here from the University of Texas at Austin, and doesn't hesitate to acknowledge the grand contributions of some sons of Texas to the current financial fiasco.

Certainly, the investment bankers in the Big Apple and mortgage hustlers in Orange County, Calif. couldn't have caused such mischief on such a world-wide scale by themselves. They needed Texan Phil Gramm and the Republican Senate to change the laws to make it all possible. Jamie agrees with me that the must-read story on the high point of the credit default swap hijinx is is the May 30 story in the Texas Observer. Send this link to anyone who still talks about the glories of financial innovation with a respectful demeanor (will some people never learn?).

The evening event caps a day-long conference at the New School on the world-wide financial meltdown. Jamie speaks about the origins of the crisis, modestly refraining from promoting his own new book, The Predator State, which these quotes, sans ellipsis marks, summarize:

The judicial coup of December 2000 that installed Bush and Cheney brought back tax cuts for the wealthy, big increases in military spending, aggressive deregulation. Bush and Cheney placed lobbyists in charge of the regulators, representing, in every case, the most extreme anti-regulation perspective. This is the predator state.

Jamie in his book argues that what began as a well-intentioned anti-regulatory movement deteriorated into crude anti-tax crony capitalism. He expresses delight that the nation has now elected someone who is mortgaged to nobody. He introduces Joe as someone with a unique record of insight and foresight about the dangers of ideological economic policies and the disasters they cause, and holds up a copy of Joe's new book, The Three Trillion Dollar War.

Joe says his initial public estimate of the cost of the war in Iraq was $1 trillion. When he presented a paper to an EPS panel in 2006, he and his co-author Linda Bilmes raised the estimate to $2 trillion. "Linda and I thought early on it might be $2-$3 trillion," he said, "but the administration was quoting very small numbers." (The original Pentagon estimate was $50 billion. Lawrence Lindsey, Assistant to President G. W. Bush for Economic Policy, got into pink-slip-level trouble after raising the estimate to a more realistic range of 1-2 percent of the then-GDP of $10 trillion, to $100-$200 billion. See here and here.)

Joe notes that a contributor to the high cost of the Iraq war is the high injury rate among returning soldiers - 15 injured soldiers for every one killed. Joe says that the U.S. government sometimes classifies an injury as an accident, as when a mine takes out a Humvee and then another Humvee plows into the first one. The injuries from the second event may be classified as an accident. The injured soldiers are adding $600 billion to the nation's unfunded liability and constitute a significant fraction of the war's cost - both economic and human.

Joe describes the Iraq War as the first war that was financed entirely on a credit card. Oil was $23 a barrel when the war started, soared to above $145 in July, has now fallen to $57 a barrel today. Latin America borrowed money to pay for higher oil prices, resulting in credit starvation in the 1980s and "a lost decade of growth" How many lost years will the United States suffer from our recent credit binge?

The failures of recent economic policies may be summarized, says Joe, under three headings:
1. The stimulus and bailout were both misconceived. Most of the stimulus package was used to pay down debt and didn't do much for consumption. Allen Sinai presented a paper projecting the worst downturn since the Great Depression and 8-12 percent unemployment. The bailout amounted to cash for trash, whereas the Brits did it differently and better, with conditions and sanctions. The bailout money has been spent on bonuses and dividends.
2. Financial regulation has failed. The financial boats have holes, their steering is gone and their pilots are drunk.
3. The budget has been mismanaged. A deficit can be a good idea if it is spent on something useful, like roads and technology, which have high returns. Using taxpayers' money to buy toxic assets is not a good use of money. We can evaluate public spending from a long-term and a short-term perspective. Our military spending has been poor managed on both counts. We have been buying less security for more money instead of the reverse.

The $700 billion commitment of the Troubled Assets Relief Program (TARP aka Bailout) amounts, says Joe, to ten years' worth of global foreign aid. Treasury Secretary Paulson seems to have seen the light and is halting the purchase of the toxic assets, following Gordon Brown's path of buying bank equity [see Telegraph story today].

Summing up, Joe says the United States has been kept going since 1993 by the tech bubble and then the housing bubble and now some improvement in exports. What we have to look forward to is perhaps two years more recession and then a continuing period of slow growth, maybe focused on renewable energy, green jobs.

Note on EPS: CityEconomist is proud that so many good groups owe their existence to New Yorkers. One of them is EPS, which sponsors economic discussions and reports about unnecessary wars and wasteful military contracts. It was founded by the late Bob Schwartz, an economist and investment adviser whose years as a Marine (he never liked being called an ex-Marine - once a Marine, always a Marine, he said proudly) led him to champion the cause of peace. I was Bob's first paid-up member in the late 1980s and followed him as the second EPS Treasurer. Alan Harper is the third. EPS Executive Director Thea Harvey has made a major contribution to bringing EPS to its current thriving condition. Legacies from Bob Eisner and Bob Schwartz have been major factors in the organization's endurance.