Amplifying Kevin Drum's remarks, Ezra Klein points out:

You hear a lot about "countercyclical policy" amidst deep recessions. You don't hear much about it amidst periods of joyously fast growth. Instead, our thumb is always on the same side of the scale: We have counter-recessionary policy and pro-expansionary policy.

The problem, as Kevin puts it, is both human and political. "How do you ensure that [countercyclical policy] happens not just during downturns, when everyone is eager for it, but also during upturns?" he asks.... "After all, no one wants to spoil a party when everyone is having a good time."

The answer to this, in part, was supposed to be that the Federal Reserve chairman is insulated from congressional meddling and popular opprobrium. He can do what must be done. But that didn't work out in the latter years of Greenspan's tenure and he was, in part, considered a hero for permitting such an awesome economy.

This is all true. It's worth noting, though, that during the 1980s, when Greenspan was doing exactly what Drum calls for, his strongest critics were on the left. I remember William Greider arguing that wages at the bottom of the income distribution only start to rise when the economy's really booming and we're close to full employment. By cutting off the highs, as Greenspan did by raising interest rates when things got too hot, he eliminated the part of the cycle when the poor get theirs.

So why have the sides switched, to the point where it's now progressives like Drum and Klein who are calling for counter-expansionary monetary policy? Perhaps it's the economic history of the Bush years, in which economic growth was decoupled from rising income not just for the poor but for the middle class too: liberals just don't root for robust growth in the way they used to.

Surowiecki:

First of all, we don’t want policymakers to assume the worst about the future when shaping economic policy. Nor do we want them to assume the best. Actually, we don’t want them to assume anything. Instead, we want them to come up with the most accurate forecast of the future they can, and to adopt the economic policies that make the most sense given that forecast.

Unfortunately, it's more complicated than that. Surowiecki's proposal would have us ignore unlikely-but-still-possible events -- "black swans," as we're now learning to call them -- because they don't fit into our "most accurate forecast of the future."

Rather, we want politicians to forecast the entire range of reasonable possibilities, estimate the probability of each of those forecasts coming to pass, and then adopt the economic policies that best optimize outcomes across that range of possibilities, taking into account the estimated probabilities and constantly adjusting the forecasts, the probability estimates, and the policies themselves in the light of new events and information. Plus also we'd like a pony.

Update: One might imagine that Surowiecki would be too busy to post a response in the comments section of this post. One would be wrong. In case it's not clear: the difference here is semantic and hinges on the definition of "forecast," which I had taken to mean "single predicted outcome" where J.S. was using it to to mean "predicted range of possible outcomes."

Why blogs are good: Today I learned two things I didn't know. From Matt Yglesias:

Probably the greatest blow Ronald Reagan struck against American liberalism was changing tax law so as to index income tax brackets to the Consumer Price Index. Before that, each and every year inflation created a small tax hike. Consequently, the default scenario was for revenue to grow. That created a situation where for three decades following the end of World War II, politicians steadily increased the volume of public services while also offering the occasional tax cut. And until the economic malaise of the 1970s, voters liked the outcomes just fine. But by seizing the opportunity provided by the 1980 election to change this, Reagan was able to shift the structure of American politics in a fairly significant way.

And from James Surowiecki, whose new blog is a bit less hand-holdy than his "Financial Page" columns:

Felix [Salmon] argues that Japan’s experience should make U.S.investors wary of buying stocks now ... because “the lesson of Japan is that even cheap stocks can continue to decline for decades." Actually, that’s not the lesson of Japan. The lesson of Japan is that a country’s stock market is not going to rise over time if, over time, its companies fail to create economic value for their shareholders. Felix says that “Japanese companies are well-run.” But in fact they’re not well run, at least by the standards that are relevant to shareholders—return on equity, profitability, growth, and managing cash flow in a shareholder-friendly way. By these standards, Japanese companies have historically been run badly, and while they’ve improved some in recent years, they’re still far behind American firms on all of these metrics.

Thomas Friedman can be a shallow thinker, but I've rarely seen him write anything as straight-up wrongheaded as this. His argument is that the government's injection of equity into the banks is probably necessary, but it's also dangerous, because ... well, here's why it's dangerous:

Let’s imagine this scene: You are the president of one of these banks in which the government has taken a position. One day two young Stanford grads walk in your door. One is named Larry, and the other is named Sergey. They each are wearing jeans and a T-shirt. They tell you that they have this thing called a “search engine,” and they are naming it — get this — “Google.” They tell you to type in any word in this box on a computer screen and — get this — hit a button labeled “I’m Feeling Lucky.” Up comes a bunch of Web sites related to that word. Their start-up, which they are operating out of their dorm room, has exhausted its venture capital. They need a loan.

What are you going to say to Larry and Sergey as the president of the bank? “Boys, this is very interesting. But I have the U.S. Treasury as my biggest shareholder today, and if you think I’m going to put money into something called ‘Google,’ with a key called ‘I’m Feeling Lucky,’ you’re fresh outta luck. Can you imagine me explaining that to a Congressional committee if you guys go bust?”

(Is there anything more perfectly Friedmanesque than the way he (a) works in a reference to the "I'm Feeling Lucky" button, and (b) misstates what it does?)

This story and the threat it raises -- future Googles stifled in their cribs by risk-averse government bureaucrats -- has no connection to reality. When Larry and Sergey wanted money to start Google they didn't go to a bank and take out a loan. First they found an angel investor named Andy Bechtolsheim, who'd made his money as a cofounder of Sun Microsystems. Then they went to John Doerr of Kleiner Perkins and Mike Moritz of Sequoia Capital, the two most famous venture investors in Silicn Valley.

In other words, they raised money by selling equity rather than by borrowing. This is how startup financing works, for obvious reasons: Almost all startups fail. So a bank that lent money to guys like Larry and Sergey would see default rates that would make subprime mortgages look blue-chip. A venture investor, on the other hand, gets a share of the upside; he's happy to watch nine startups fail as long as the tenth is Google.

(Venture firms are currently reducing their investments in response to the bleak economic picture, and that might slow the parade of new Googles, but it has nothing to do with government ownership of the banks.)

OK, ignore the Larry-and-Sergey story. Does Friedman have a deeper argument? I guess it's that banks with public equity will be more risk-averse in lending, because ... well, he doesn't really say why. Oh, OK, he says they'll have to justify each failed loan to "a Congressional committee," which given the number of loans involved is absurd on its face. Is that just a cutesy way of saying that they'll have to justify their balance sheets as a whole? If so, what makes Friedman think a Congressional committee would be more risk-averse than private shareholders?

The problem in the economy is that, right now, private lenders are maximally risk-averse: until last week they weren't lending at all. The government took positions in banks precisely to encourage them to make riskier loans than they were making under private ownership. It doesn't seem to be working, but (pace Friedman) that's not because those bold risk-taking bankers are being stymied by government bean-counters. It's because the banks don't want to make any loans at all, and (so far) the government isn't forcing them to.

Yglesias says the NYT's speculations on the composition of the Obama administration are ill-founded: "the Fed Chairman is more important than the Treausury Secretary," so there's no reason Paul Volcker, Robert Rubin, or Larry Summers would want to run Treasury.

But isn't the Treasury Secretary more important now that: (a) s/he's in charge of a big chunk of the banking industry; and (b) the economy's in too deep a hole to be rescued by monetary policy? The next administration's response to the recession is going to have to involve substantial fiscal stimulus (unless the next administration is staffed by lunatics), and you'd imagine the Treasury Secretary would be heavily involved in that.

In a way the Treasury Secretary is like one of those hammers kept behind a thin pane of glass -- most of the time it's just sitting there, but it's really important in an emergency.

(Perhaps RoBros legal advisor and former Treasury intern Ty Alper could weigh in.)

Whoa: Earnings from the news operations of the New York Times (i.e. the newspapers as opposed to the company's other holdings), third quarter of last year: $79 million. Third quarter of this year: $37 million.

Brookswatch! (Let's just make it a regular feature and be done with it.) So today David Brooks checks in on Patio Man, a character who typefies the rising exurban middle class. Weirdly, I don't find the Patio Man concept particularly annoying, for two reasons: (1) Brooks doesn't overuse his coinages the way his colleague Tom "flat world/petro-authoritarianism/green-collar jobs/etc. etc. etc." Friedman does; and (2) Brooks's attention to the actual conditions of life in the exurbs is a useful counterweight to the Palinites' fetishization of an entirely invented "Main Street." Also, to be honest, maybe I'm soft on Patio Man because today he's leaning Democratic:

But deeper down, there are some shifts in values. Americans, including suburban Americans, are less socially conservative. They are more aware of the gap between rich and poor. They are more open to government action to reduce poverty....

But the shift in public opinion is not from right to left, or from anti-government to pro-government, it’s from risk to caution, from disorder to consolidation....

Democrats have done well in suburbia recently because they have run the kind of candidates who seem like the safer choice — socially moderate, pragmatic and fiscally hawkish. They, or any party, will run astray if they threaten the mood of chastened sobriety that has swept over the subdivisions.

But look at Brooks's weird swerve in the last paragraph:

Patio Man wants change. But this is no time for more risk or more debt. Debt in the future is no solution to the debt racked up in the past.

If Patio Man really believes this, Patio Man is obviously wrong. (Even the Committee for a Responsible Federal Budget, whose raison d'être is to fight deficit spending, agrees that the present situation urgently requires deficit spending.) It wouldn't be too surprising for Patio Man to be wrong about this: he probably hasn't read Keynes, and he has a tendency to overgeneralize from family budgeting to fiscal policy. ("Debt in the future is no solution to debt in the past" might make sense when it comes to Patio Man's own finances, but the rules that apply to a suburban family don't necessarily scale to the level of the federal government.) But does David Brooks agree with Patio Man on this? If not, shouldn't he come out and say so? If so, shouldn't he go down the hall and ask Paul Krugman for some very remedial tutoring?

Jacob Weisberg argues that the financial collapse is final proof of the bankruptcy of libertarianism.

Via Krugman, a little FT piece on the relevance of J. M. Keynes to the present crisis. Plus here's Krugman's own introduction to the 2006 edition of The General Theory of Employment, Interest, and Money.

Talking about last night's debate, Michael Tomasky sounds like the bumbling cartoon detective who considers every possible explanation except the obvious one.

By 53-22%, 638 uncommitted voters polled by CBS chose Obama as the winner. CNN was a little closer, 58-31%.... I actually don't understand it. I didn't even think Obama was quite on his game. He should have gotten much the better of the economic-crisis debate, but it seemed to me that McCain represented his proposals slightly better than Obama represented his.... Maybe it's just about McCain. Maybe he just looks like he's ready for the glue factory.... Or, maybe it's the politics. Maybe 90% of the people who are usually swing voters are just so disgusted with the Republicans that they're not going to entertain the idea of voting for McCain under any circumstances.

Or maybe it's that voters, unlike pundits, don't watch debates as though they're scoring gymanstics events. Maybe voters are less concerned with who represented his proposals better than they are with what those proposals actually, you know, are. Maybe they prefer the guy who does an OK job describing a policy that will get them health insurance over the guy who does a slightly better job describing a policy that won't get them health insurance. Just an idea.

Newly minted Nobelist Paul Krugman wrote this in 1992, an account of his intellectual heuristics.

I have no sympathy for those people who criticize the unrealistic simplifications of model-builders, and imagine that they achieve greater sophistication by avoiding stating their assumptions clearly. The point is to realize that economic models are metaphors, not truth. By all means express your thoughts in models. But always remember that you may have gotten the metaphor wrong, and that someone else with a different metaphor may be seeing something that you are missing.

Five months ago, This American Life did a great episode explaining the mortgage crisis. This week's episode (iTunes, web) explains the bigger financial crisis; it's even better. Unless you work in finance or economics, I guarantee that you will be smarter after listening to it.

Norman Ornstein: "Two key words have been largely missing from the debate over our financial crisis: moral hazard."

Google: "Results 1-10 of about 13,400 over the past month for 'moral hazard' 'financial crisis.'"

The weirdest case in favor the bill came from Minority Leader John Boehner, who yesterday called the bill a "crap sandwich." "Nobody wants to vote for this," he yelled. "Nobody wants to be anywhere near it. ... You all know how awful it is. I didn't come here to vote for bills like this!" But, he went on, "I believe the risk in not acting is much higher. ... These are the votes that separate the men from the boys and the girls from the women. What's in the best interest of our country? Vote yes," he concluded and dashed away from the podium in tears.

"Maybe I say this because people keep using the word crisis all the time, but I was just thinking 'you know, it kinda feels like the United States is in the middle of a big crossover event right now.'"

Part 2: Top conservative thinkers have finally found a way to blame the collapse of the U.S. economy on political correctness! I assume they get some kind of prize:

I always listen to Mark Levin while making Friday night dinner. Tonight he is giving the most serious, intelligent, cogent explanation of the current economic crisis I have heard or read anywhere.... Funnily enough, he has explained just what it is community organizers do. Advocating, for instance, for affordable housing for the poor — the poor who traditionally rent, because they are bad loan risks. The day that reasoning by banks was junked as "racist," was the day this crisis became a possibility.

It must be sad to know that your movement is undergoing total intellectual collapse. [Via Andrew Sullivan.]