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Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: Jim Willie CB who wrote (3914)	8/5/2002 1:11:11 PM
From: stockman_scott	Read Replies (1) \| Respond to of 89467

A QUIBBLE WITH STEVE ROACH (8/2/02) By Paul Krugman [An economist from Princeton <G>] A QUIBBLE WITH STEVE ROACH (8/2/02) As readers of my column know, I'm a great admirer of Morgan Stanley's Steve Roach. I think he's been right on many of the issues where he has stood against the conventional wisdom. I also think he's very brave. I offend a lot of people, but I live a quiet life in central New Jersey, and don't have to confront the people who hate me face to face. (I was worried about Mr. X, but now that the FBI has finally decided to search his apartment I'm a little less nervous about opening the mail.) Roach, on the other hand, has to face his detractors in boardrooms and conferences every day. But I do have a small quibble with one thing Roach has been saying. Among his list of reasons for expecting a double dip is the U.S. current account deficit, which he says will force a contraction of domestic demand. Now he's right that at some point the world will refuse to finance the CA deficit, and a necessary counterpart of a move to balance will be a fall in domestic demand. But will this be a drag on the economy? It seems as if Roach has forgotten that the counterpart of a fall in capital inflows is an increase in net exports: domestic demand must fall, but only to make room for that increase in net exports. Try taking a simple Mundell-Fleming model and putting in a risk premium on domestic bonds: r = r* + p. You'll find that an increase in p leads to a currency depreciation, but that output rises; domestic demand may fall, but only because the export-led expansion drives up the interest rate. You might object that this conclusion is refuted by recent history. For example, when markets became unwilling to finance Indonesia's current account deficit, the result was a nasty economic slump. But the reason why currency depreciation was contractionary in Indonesia, Thailand, Argentina, etc. - or so current theory has it - was that so much domestic debt was denominated in foreign currency. This meant that when the rupiah or the peso fell, it devastated balance sheets, leading to an investment collapse that offset any pro-competitive effects of a weaker currency. That won't happen here. A lot of nonsense has been written about the international role of the dollar: it is not true that foreigners are forced to take our bonds, that the U.S. can run current account deficits forever. (Foreign criminals like our $100 bills - but that's a limited thing, and anyway faces new competition from the euro.) But one thing is true: U.S. corporations carry debt that is denominated in dollars, and will not suffer balance-sheet problems when the dollar falls. The rest of what Roach says seems to me entirely right. I think housing is having the moral equivalent of a bubble; I think households, suffering from Dow 36,000 illusion, have been saving far too little and will pull back as reality strikes. That's easily enough to warrant fears about double dip. But we're not Indonesia. Isn't that reassuring? wws.princeton.edu

To: Jim Willie CB who wrote (3914)	8/5/2002 1:15:55 PM
From: stockman_scott	Read Replies (2) \| Respond to of 89467

GET RUBIN By Paul Krugman (7/27/02) If you want to see the smear machine at work, this latest - apparently abortive - attempt to implicate Robert Rubin in the Enron affair is a classic. Here's what happened: we have learned that Citigroup helped Enron by structuring loans in a way that inflated reported revenue. This is not good, but also no surprise. For sure we will eventually learn that every major bank did something like that for some company. It was, alas, what was happening during the bubble years. But it took about 30 seconds for the right-wing scandal machine to pounce. Robert Rubin works for Citigroup! And he was a Clinton-era icon! So he's guilty! Off with his head! Republican operatives began sending thousands of faxes; talk radio made Rubin's sins topic # 1; and Andrew Sullivan dutifully attacked Rubin in his blog. And with amazing gullibility, the likes of Tim Noah at Slate jumped on board, without bothering to check even the most basic facts. The big joke is that the Enron deal took place months before Rubin joined Citigroup. Oh, well, maybe he had a time machine. (Reports suggest that Sullivan does - that rather than admit to a mistake he revised his post, a big no-no in the blogging world.) But even without the nonsense over the date, would this have made any sense? Rubin doesn't run Citigroup; his actual duties are vague, but probably involve a little bit of big-think and a lot of door-opening. Clearly he is not in the operational chain of command; the people structuring financial deals are very unlikely to run them through his office. It's sort of like blaming me for the Princeton web-snooping fracas - hey, I wonder why Sullivan hasn't tried that? To get a sense of what would justify a real presumption of guilt, consider the case of Thomas White. The Secretary of the Army was actually in charge of Enron Energy Services, which created $500 million in fictitious profits during his tenure - and that was all it accomplished, since it was actually bleeding cash. But he's still in his post, because, say his defenders, you can't prove that just because he was in operational charge of the division he had any idea what it was actually doing. This kind of thing gives double standards a bad name. wws.princeton.edu