Asymmetrical Information

Oh my. Jane, I know you're young. But you're more idealistic than I'd supposed. You propose a "deal" with Democrats on a matter of domestic politics? Might as well propose a deal with North Korea on matters of nuclear arms.

And think! If the Democrats win the White House, they'll be in control of weapons of mass destruction.

Rubin is smart. Robert McNamara was smart. McNamara's "brilliance" almost destroyed both Ford Motor Co. and the US military. Rubin, in his "brilliance", is fundamentally wrong in his understanding of the effect of government deficits on interest rates. So far, it looks like Rubin has not done as much damage with his theories as McNamara did. Our economic future would be much better however, if Rubin's influence were drastically curtailed and his ideas roundly discredited for the foolishness that they are.

Yeah, such terrible economic times we had under Rubin. Thank God the GOP is now in charge, huh!

Laying off Bob Rubin:
How about if the defense stops alleging David Westerfield is a regular guy , if the prosecution stops reminding us he is a monster. Moral equivalance anyone?

\Why shouldn't Rubin take his knocks along with Martha Stewert, et. al., Does he have any special skin worth protecting? Rich and Smart.? Megan you are selling out–or worse.

Hehe, pubic.

(Sorry, couldn't resist letting out the inner Beavis and/or Butthead.)

The problem is that Rubin was in on Enron, from the beginning (back when it was called Houston
Natural Gas)he was Goldman's representative on
the meeting that merged HNG into Enron, & placed Ken Lay in charge( Re; Den of Thieves; pg 151; Landon Thomas NY Metro; Feb 2002)If Bush can be
hounded about one oil deal back in 1987 with Lay,
the man who helped create Enron, should suffer
some scrutiny

Narciso: I would say that it's usually not the best idea to draw your tactics from those of your foes. Even more so if those tactics do not work.

I will continue to beat on Bob Rubin as long as the Dems push for campaign finance reform and otherwise pretend to be holier than thou. Pointing out your opponents hypocrisy is not just an effective political tactice, it is a civic duty.

Jane,

The only problem I have with Rubin's actions is that it was useless. Why go to the Treasury? This was a decision by the rating agencies and they don't take their orders from the government.

Well, I have a bigger problem than that -- I'd be hopping mad if he'd succeeded. Getting the government to lean on the bond agencies - feh! But I don't think that he really thought he would.

Unfortunately it happens. Not everyone is happy with their ratings and they will use whatever tools they have to try to influence the outcome. I've seen it many times. It was Rubin's job to look out for Citi's interests.

GT,

I don't recall ever having economic times "under Rubin". Thank God, Rubin couldn't be an economic czar and had so little influence on the day to day lives we led while he was at Treasury. Thank God, Clinton wasn't able to make any significant change in the government policies which were in effect when he became president.

Rubin's theories on interest rates has been proven to be wrong. The evidence is overwhelming. His argument is nonsense on its face. I notice that you make no effort to defend his ideas.

The problem is we cannot be proscribed by these
Marquis of Queensbury rules; Example; one of Harry
Truman's last campaign statements back in 1948,
intimated that voting for Dewey, would be voting
for the same people who put forth our enemies in
the last war. Now, besides this being a basest of
libels,(supported by the slim reed of the Dulles
Bros. pre-war investments)it happens to have been
one of the factors behind his remarkable last minute victory. It ignored the role of other Germanophile businessman, already ensconced in Govt like Forrestal, Draper, Lovett, Harriman
Rockefeller.In the same vein, Much has been made in some circles, (by the director of a supposed tax exempt educational foundation) of the charges leveled against one of the companies, that the current President's grandfather; incurred during WW2, but little has been observed of actions against similar arrangements by parties who were in government positions at the time; (ie; Donovan, Forrestal with GAF; and Harriman & Lovett again; among others again )What is to made
of these charges, which are cousin to 'the Bush
is behind 9-11 allegations' which are tantamount
to seditious propaganda

Stan,

Here’s what you wrote:

Our economic future would be much better however, if Rubin's influence were drastically curtailed.

Given how well we did when his influence was at its peak I would have to disagree with you.

By the way the idea that reducing a budget deficit can lower interest rates has not been ‘proven wrong’. It may not have been completely proven right either but it hasn’t been proven wrong. The impact of the budget, as with many other things in economics, is not precise and different studies have given different views. Here you can find a study that shows a link between the two. It’s a topic still in discussion.

I fail to see how "budget deficits increase interest rates" *can* be proven wrong. I mean, mathematically, where the hell does the money go?

Well, for one thing, government bonds aren't perfectly substitutable with private bonds, and for another, the data just doesn't show that big an effect. Or so I'm told.

Time and uncertainty, dear boy, time and uncertainty. The entire spectrum of interest rates is influenced by the market's expectation of the entire future path of government borrowing, but it's a massive leap from there to say anything about the link between today's deficit and today's interest rates.

Maybe the problem is the shorthand mechanism being used (interest rates) when the better description is the actual effect (lower growth):

1) Money is allocated between consumption and investment.
2) A deficit is a shift from investment to consumption.
3) Therefore, unless deficits are matched entirely by corresponding cuts in private consumption, total domestic investment falls.
4) Falling total domestic investment reduces growth. Increased foreign investment could make up the shortfall in net investment, but the returns on that go to foreign investors, not domestic ones, so it's still "reduced growth."

Now, you'd imagine over some arbitrarily big long run people figure it out, and they'll end up sticking the total investment rate at whatever's necessary to get the future income they want. The question is how long it takes them to "notice" at an aggregate level, and raise private investment to match.

I haven't seen a study showing significant matching private investment increases for the 1980s deficits, so there you go.

The "deficits are an obligation for interest payouts to future bondholders, which should at some hypothetical point increase taxes" concept is also pretty unassailable.

That's far too crude. For one thing, if budget deficits actually sucked up private capital and raised interest rates for everyone else, that should then increase private savings, counterbalancing the borrow-and-spend effect.

Read here for a fascinating discussion.

In glancing through some of the recent stuff on the relationship between deficits and interest rates, one thing that seems to be missed, in some of the studies and a good bit of the back and forth here, is that old "all else equal" qualification so necessary to thinking about the effects of single factors in complex systems. Interest rates seem very responsive to growth and inflation, as well as to expectations about both. Only after some effort to control for those factors are we likely to see the impact of deficit, which in the US are now fairly small as a share of GDP. Some of the analysis offered lately tries to exclude the middle -- claiming that the strong influence of growth and inflation on interest rates excludes the possibility of any influence from deficits.

I'm not clear on what part of McCullough's argument you mean to say is "far too crude". On the assumption that it is in answer to the assertion that higher interest rates lead to a lower level of investment and growth, if you grant that higher deficits lead to higher interest rates, then you are well on your way to admitting to a lower level of investment. Sure, higher interest rates will induce higher savings, but private demand for funds is pretty likely to fall at a higher interest rate. You have to make a pretty strong assumption about the elasticity of demand for funds to claim otherwise. "Counter-balancing" takes place, but at a lower level of investment, so a slower pace of growth. McCullough also seems to refer to the Gale and Orszag argument about income growth lagging output growth as foreign funds account for a larger share of investment. Also a pretty simple argument, but I haven't seen a strong counter to it.

That's far too crude. For one thing, if budget deficits actually sucked up private capital and raised interest rates for everyone else, that should then increase private savings, counterbalancing the borrow-and-spend effect.

Either the new bonds come out of money that would have been spent on capital anyway or they come out of consumption. If out of consumption, there should be a noticable rise in private savings during times of deficits.

A quick Google doesn't give much supporting evidence. For one thing, saving cratered from the mid-80s on, just when deficits started spiraling out of control.

Yes, it's crude, but it makes sense if you subscribe to some variant of "mostly good" decisionmaking.

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