Paul Gregory

Paul Gregory

Paul Gregory, a Hoover Institution research fellow, holds an endowed professorship in the Department of Economics at the University of Houston, Texas, and is a research professor at the German Institute for Economic Research in Berlin. His most recent book is Politics, Murder, and Love in Stalin's Kremlin: The Story of Nikolai Bukharin and Anna Larina (Hoover Institution Press, 2010). He blogs at

More Speculation Nonsense

I regret that the “profitable speculation” diagram has disappeared from economics texts. If more people knew it, we could avoid unnecessary nonsense. Even observers from the right have no idea of the positive role of profitable speculation. Bill O’Reilly this evening launched another attack on speculators.

If Bernie Sanders’ (and others’) proposals succeeded in eliminating speculation, we would experience broader price and quantity swings and would be worse off.

The concept is very simple. If speculators anticipate lower future supplies (and higher prices), they buy now and hold for future sales. If they guess right, they sell in the future at a profit. If they guess wrong, they sell in the future for a loss. The profitable speculator has moved supply from a period of relative abundance to a period of relative scarcity and has smoothed out prices. We have been made better off.

In other words, profitable speculators perform a positive service for the economy. Unprofitable speculators make things worse, but they can’t stay in business if they continue to guess wrong. They disappear. Those with a knack for speculation remain and smooth out prices and supplies.

Notice that there is no outcry when speculators conclude that future supplies will improve and they push prices down.

I guess that people will never understand this simple proposition. So we’ll have to live with this hot air.

I wrote the following advice to President Obama in late August:

“Instead of trying to prop up the overbuilt housing market, the President should propose measures to allow the economy to work off its excess inventories of housing and to find a bottom in housing prices. Only after the bottom is reached will construction resume.”

In a campaign appearance, Mitt Romney came to the same conclusion, saying that we must let the housing market clear and then we can have a recovery. Romney was widely ridiculed and has said little since then. In the meantime, Obama has tried one scheme after another to keep housing prices up and foreclosures down.

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Today’s gloom-and-doom Times piece concludes that the Russian protest movement “collided with the cold reality of Mr. Putin’s convincing victory” in the March 4 presidential election. Protesters lack a leader and a positive message. Sunday’s demonstrations gave them an opportunity “to cry out together, one more time, for political freedom.” No further demonstrations are scheduled. All is lost. Putin has won.

The White House has signed on to this “Putin has won” version.  After five day’s of hesitation, President Obama called Putin, as the White House communiqué reported, to congratulate him on his March 4 victory. Other Western nations sent more muted messages, but not Obama.

Not so fast. Let’s get this straight. Putin did not win a “convincing electoral victory.” Real elections require an opposition, not the sorry rogues’ gallery Putin allowed to oppose him. His Central Electoral Commission disqualified everyone else. As one protester complained: “We can’t go to the courts. We cannot go to the prosecutor.” The streets remain the only option.

As long as we believe the big lie that March 4 was a real presidential election, Putin can triumphantly declare (with tears in his eyes?) democracy alive and well.  True: Voters went to the polls. Putin might have won even without the ballot stuffing, carrousel voting, and intimidation. But Putin’s “Party of Scoundrels and Thieves” barely scraped by against the shopworn communists and nationalists in the December 4 parliamentary elections. He could take no more chances.

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Greece: Default or No Default?

Yesterday, 83 percent of Greek sovereign debt holders agreed to “voluntarily” exchange their bonds for new bonds with face value of 53 percent of the original bonds. The Greek finance ministry announced that it would invoke the collective action clause to impose the swap on an additional thirteen percent of bond holders who did not agree to the swap. This thirteen percent purchased Greek sovereign bonds under Greek law and are subject to the parliament’s collective action clause. This seems to leave seven percent holdouts who did not agree to the swap and did not purchase under Greek law. What will happen to them remains unclear.

With this “successful” restructuring, the troika monitoring Greece agreed to release a new tranche of bailout funds to stave off a “disorderly” Greek default. These funds will give Greece a short amount of breathing space.

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The Times’ March 1 news piece Tensions Raise Specter of Gas at $5 a Gallon reflects an obvious media bias. As the Times news piece claims, rising gas prices are the result of international events over which President Obama has no control. I cite the first paragraph:

With no clear end to tensions with Iran and Syria and rising demand from countries like China, gas prices are already at record highs for the winter months — averaging $4.32 in California and $3.73 a gallon nationally on Wednesday, according to AAA’s Daily Fuel Gauge Report. As summer approaches, demand for gasoline rises, typically pushing prices up around 20 cents a gallon. And gas prices could rise another 50 cents a gallon or more, analysts say, if the diplomatic and economic standoff over Iran’s nuclear ambitions escalates into military conflict or there is some other major supply disruption.

Under Bush, the “rising gas price” news story would invariably mention Bush by name, Big Oil, and his long-standing ties to the oil industry.

I was about to document this media bias by searching news archives, when I found an excellent blog of March 1 by Julia Seymour, whose main results I cite below:

The Business & Media Institute examined all the broadcast network news reports mentioning gas prices during each of those time periods and found ABC, CBS and NBC aired more than 2 ½ times more stories (63 stories to 24) in 2008 than they did in 2011.

But it was more than just the amount of coverage that showed the media’s willingness to spin gas prices one way under Bush, and another way under Obama. In 2008, network reporters mentioned "Bush," the "president" or "government" in gas price reports 15 times more often than in 2011 under President Obama (15 stories to 1).

Congratulations to Julia Seymour for excellent reporting and analysis.

Credit default swaps are default insurance for corporate and sovereign bonds, to be paid in the event of the restructuring of the debt, a failure to pay coupons or principal on the bonds, or a bankruptcy.

The International Swaps and Derivatives Association’s EMEA Determinations Committee voted yesterday that no “event” had occurred despite the Greek parliament’s passage of legislation that forces private creditors to accept losses on their holdings.

The Greeks and banks that sold credit default swaps had hoped to avoid triggering the credit default swaps by claiming that the swap of Greek bonds for “new” bonds at a loss of 53.5 percent was “voluntary.” The problem with this argument was that a number of private lenders were not willing to go along. Now the Greek parliament has legislated that they must.

So we now have a restructuring that is not a restructuring. We’ll have a default that is not a default. We now use semantics to solve inconvenient problems in new virtual universe of finance.

Greece’s long term problem is that lenders do not trust it to meet its obligations. I trust that memories are long. Such arbitrary action against private lenders and against holders of credit default swaps will only delay Greece’s return to credit markets. Moreover, they cast a pall over sovereign debt, the cost of which  will be borne by borrowers generally.

Holders of credit default swaps join Chrysler’s secured lenders.

President Obama calls for “social justice.”  He agrees with the motley “occupiers” that the One Percent gets almost everything.  Reagan and the Bush tax cuts burdened us with a tinderbox of inequality, he lectures us. The rich should pay their fair share. “Enough is enough.”  We must create a “just” society that guarantees the poor a dignified life.

In a word, we must become like Europe, for whom Obama expresses open admiration.

Obama apparently does not know that the European countries that have become “fairer” over the past two decades are now basket cases of debt, social unrest, and an unaffordable welfare state.  Those European countries that have had the discipline to become “less fair,” are, in the words of a sympathetic liberal columnist (The GOP scrambles for a bogeyman) “doing well economically, both in absolute terms and in contrast to us.”

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There Is Still No Greek Solution

The press is again full of reports that the troika (IMF, EU, and ECB) have reached an agreement on Greece. Markets will again rise, until they see that little has happened.

The troika has agreed to release a new tranche of rescue funds to stave off a March Greek default. Private lenders have agreed to their haircut (but that had really been decided a long time ago). The rescue funds will probably be doled out slowly to make sure that Greece meets its end of the bargain and cuts wages and public sector employment.

With an election coming up (and the public vehemently against outside intervention and austerity), Greece cannot meet its end of the bargain. Greece can only do so by agreeing to be governed by external bodies, such as the troika, which spells the end (temporarily perhaps) of Greece independence.

This is one of a hundred of steps that remain to be taken before we can say that Greece has been rescued.

Scene: Senate Committee on Finance Hearing Room. Date: Sometime in 2012. Martha, a stylish attractive woman in her 70s, raises a shaking right hand as she is sworn in. The network cameras are notably absent. They have been told by their management to stay away.  CSpan is covering another hearing and Fox News has been delayed.

Senator John Coburn (R Oklahoma) begins the questioning:

Coburn: We are meeting here to discuss the President’s proposal to raise the rate of taxation on capital gains from 15 to 23.8 percent. We understand that you have particular views on this subject.

Martha: Yes sir. I am a widow. I live in a nice retirement community inHouston, Texas. My social security check pays for most of my living expenses, and I do some part time work. But I have to cover the rest by selling off the stock I own.

Coburn: So you are one of the millions of ordinary Americans who own stock?

Martha: Yes, my late husband Sam was pretty good when it came to investments. Before he died ten years ago, he told me to hold on to my stocks as long as I could. He was particularly high on Massachusetts Investors Trust. Barron’s lists it in its “Best Mutual Fund Family,” I am told. All I can say is that Sam trusted this company. He had a big share of his assets in Massachusetts Investor’s Trust.

Coburn: How have these stocks been doing? We all know the market has been down.

Martha: My stocks have not done well since Sam died, especially the last five years. But I need more money to pay my bills, so I finally sold my Massachusetts Investor Trusts. In December, I sold $20,000 worth of shares and my broker told me that my capital gain was $2,600, and that I would have to pay a tax of $390.

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