Don’t you find it interesting the amount of effort this White House puts toward going out of its way to discredit its critics by name?

In the latest episode, they take aim at an analysis of the CARS (”Cash-for-Clunkers”) program by auto analyst Edmunds.com, contrasting its methods and conclusions with those of a report by the Council of Economic Advisers.

The essence of the White House’s critique of Edmunds is that they reached the “wrong” conclusions.

The White House hates the fact that the Edmunds story contained a brilliant headline. The Obamians won’t quote it of course. But in case you missed it, Edmunds concluded that each vehicle sold with a CARS-program assist actually cost taxpayers more than $24,000.

How could that have happened? Because a lot of the sales of vehicles that took place with a taxpayer assist would have happened anyway. According to Edmunds, the number of INCREMENTAL sales (sales that would not have occurred without the Clunker subsidy) was closer to 125,000 than to the nearly 700,000 the government claims.

Did that make sense to you? Nearly 700,000 vehicles were purchased this summer with a taxpayer subsidy, but only about 125,000 of those purchases would NOT have occurred without the subsidy.

The White House accuses Edmunds of not publishing their analytical methodology. Either I’m blind or they’re lying. The analysis was based on an examination of parallel sales trends of vehicles (like luxury cars) that were NOT eligible for a CARS subsidy. These trends showed a steady improvement in overall vehicle sales over the subsidy period. Edmunds assumed the historical sales ratios between luxury cars and non-luxury models, and they compared them to the actual sales increase observed for the CARS-eligible categories. That gave them an above-trend increase of about 125,000 units. Whether or not it’s true, it at least makes sense.

What we actually saw in September, after CARS ended, was that sales collapsed, in fact to almost the worst annual selling rate we’ve seen all year. This is what you’d expect if the CARS program didn’t actually stimulate demand, but instead “borrowed” it from subsequent months.

But if Edmunds is correct, then you would expect that car sales will show slow but steady improvement over the next few months, as the statistical noise from CARS washes out. I’ll be watching like a hawk, and will give you the scoop as soon as the data are in.

One data point I found fascinating, and which might support the expectation of slow improvement, is the average selling price for a new vehicle during CARS: at a touch over $26,000 before incentives, it’s not far off the historical average. That suggests a market that isn’t in the process of fundamentally readjusting to lower valuations. If this turns out to be true, it hugely good news for the auto industry.

What is the White House saying instead? They’re arguing a straw man. They’re not refuting in any way Edmund’s case that the auto market may be in the process of slowly healing, even without free money smilingly dispensed by Barack Obama.

What they’re saying is something totally different, and in fact quite defensible: that the industry ramped up production runs in order to meet the extra demand from the CARS program. Hilariously, they point out that private automakers did this based on their sales forecasts, and so the market must be right.

First off, much of US automaking capacity is no longer private. The UAW, along with their business partners the taxpayers, now own a good chunk of GM and Chrysler. The government is part of the decision-making process, and is entirely happy to force non-market outcomes when they think it makes sense.

More to the point, the US automakers largely stopped making cars in the first half of this year, so they were running on almost no inventory. At some point, you just have to rebuild or you have nothing to sell.

And third, it would have been clear from the trends noted by Edmunds that demand has been recovering slowly even without the CARS stimulus.

Instead, the White House is stressing that the accelerated production runs acted to preserve jobs among unionized automakers. This is the point they really care about. Not whether you and I are in the market for a new car.

From an activist economic policymaker’s point of view, what matters isn’t whether demand is picking up. What matters is whether there is an uptick in employment. And it’s right that this should be the White House’s focus.

But the White House has a political problem because they badly need for the rest of us to give them credit for any improvement in the economy. The Clunker program has been convincingly criticized as a waste of public money. It doesn’t serve Obama’s interests to hear anyone say, let alone prove, that economic conditions are getting better on their own.

That’s why he decided to shoot the messenger.

I’m sorry to keep exercising my fetish for global capital and trade flows, but the massive rise in overall indebtedness in the US since 1980 which Surowiecki mentions, correlates well with the global imbalances that started up in the mid-Seventies and have been growing ever since. When I read that the growth in indebtedness follows from a change in consumer behavior, my reaction is that he has it backwards.

Under both Bretton Woods and the so-called “Bretton Woods II” regime, countries have been able to develop by building export industries, with the US as the primary source of demand. Under BW II, we pay for imported goods by giving future claims on American assets. This has been very beneficial for US consumers (and investors too, by the way), but it implies a structural demand for dollar-denominated assets, mostly debt. To me, this explains most of what seems to be an explosive rise in American consumption patterns over the last three decades.

It also explains the shift from goods to services. The former can be imported at a much lower cost, the latter not so easily. This makes services relatively more expensive.

Where does that leave us today? Well, the global imbalances are just as large as ever, and they’re still growing. (The famous Chinese stimulus which has gotten credit for pulling the world out of recession has gone mostly to investment rather than consumption.) But since sometime in 2007, we’ve started exchanging public debt for private debt. The Chinese have stopped buying claims on US residential housing (via agency securities) and started buying claims on future US tax collections (via Treasury securities). The fact that Obama and the CBO both issued projections of fiscal deficits in the high single digits (as a percentage of GDP) for the next ten years totally reflects this structural shift.

What it means is that consumers will be buying less of what they want to buy, as government buys more of what it wants to buy. This is a permanent, secular shift, and you’ll start seeing the social changes from it as we get through the next few years. An eight-year Obama presidency will be seen by our grandchildren as the start of the “lean times.”

If there’s any logic to this at all, it’s to insulate the gulf states from what they have today, which is that they import our monetary policy through the mechanism of linked currencies. We’re creating money like it was going out of style, but we suffer no noticeable inflation because there’s no demand or investment in the US. States like Saudi that link their money to ours DO get the inflation, however. If they were to sell oil in some harder currency (meaning, one with higher short-term interest rates) like the euro, then they’re insulated from some of that pressure.

As always, however, the problem with trading in anything but dollars is that there isn’t enough of anything else to float the global economy, and that will take years to change.

The most outlandish thing I heard, however, is that they would want to trade oil for gold. I’m not at all sure this is possible for technical and logistical reasons, but it would be a radical change if something like it could ever happen. It would end the whole mechanism for the global imbalances that are the cause of the serial financial crises. It would whack a big chunk off US standards of living overnight and touch off a deep global recession. I’m still thinking about whether it could be the long term fix the world needs.

Something like this could be the trigger to force Americans to start developing a real economy again, but there’s a very frightening risk that we would lurch sharply in the wrong direction, toward more socialism. With Obama in the White House, I don’t want to take this risk.

Naked short-selling dispenses with the borrowing of shares. It’s been around for a very long time, and the rules have frowned on it for a very long time, since it’s always been associated with market manipulation. At issue now is some proposed new rulemaking to make naked short selling more difficult and costly to do.

Today we’re reading dueling posts by Matt Taibbi and John Carney. Taibbi sees naked short selling as one of the root causes of the financial crisis. And Carney thinks naked shorting is fine and dandy because it promotes market efficiency and liquidity. Taibbi has the better of the argument in economic terms. Too bad he’s making a political rather than an economic argument.

Many have supposed that widespread naked shorting was partially responsible for the rapid meltdown of Bear Stearns and Lehman Brothers last year. Frankly, there was chicanery going on in these events, but it’s wrong to ascribe the bankruptcies to short sellers, naked or otherwise. Bear was caught in a liquidity squeeze because they suddenly lost their ability to borrow overnight funds. With Lehman, CEO Dick Fuld was too pigheaded to line up additional sources of capital while he still had the chance. Short-selling in these companies’ stocks was the result of their failures, not the cause.

Economically, a naked short is something like an American-style call option but with the exercise right vested in the counterparty. In essence, the seller says to the buyer “I will deliver shares to you on a date of my choosing, in return for payment at today’s market price.”

On this analysis, you could simply say that the naked short-seller must deposit margin with his broker to cover the risk that the market will move against him, just as with any other forward transaction. And beyond that, it’s all good.

But what’s the buyer’s economic incentive to engage in this transaction? None whatsoever. Indeed, he expects settlement of his buy overnight or the next day. Instead he takes open-ended risk that the seller won’t execute the transaction, and he gets no compensation for the risk. That’s why naked short-selling is fraudulent. The naked short is essentially hoping that the buyer won’t recognize the risk he’s inadvertently assuming.

Jim Carney’s argument from liquidity and market efficiency is a red herring. There must be an avenue for short selling because the market needs a way to punish bad companies. But the short seller must not be allowed to shift risk to parties that are not compensated for bearing it. It’s also easy to use derivatives to bet on an anticipated decline in a company’s stock, but again, you have to put up the right amount of margin.

Short selling is technically complicated and difficult to do in size, compared with normal selling. There are good reasons why that should be so. Carney appears to argue that naked short selling is good *because* it reduces the friction associated with short selling. To me, that’s a bad thing, and entirely representative of the kinds of risk-shifting that precipitated the financial crisis in the first place. It’s a good idea to impose tougher constraints on naked short-selling.

The counterargument from the beginning has been that the only thing in sight which could drive a recovery is government stimulus and rebuilding depleted inventory. Also there is evidence in the available data that the cash-for-clunkers program (which is fiscal stimulus by another name) spurred a short-lived spike in manufacturing activity. And, there was a one-time rash of new orders for commercial airplanes in July that skewed all the data upward. To date there is no evidence of an uptick in consumer demand or in business investment, although the stats on the former are coming in less bad than originally feared.

All week long, that counterargument has been taking hold in markets. With the unexpectedly poor manufacturing and unemployment data released today, stock markets are weak again and government bonds are soaring. The 30-year bond, which has been the star of the show all week, is now yielding below 4% for the first time since the rally began last winter.

And this is harder to notice unless you’re looking closely: there are signs that corporate debt spreads have stopped compressing over the last two weeks. That’s a sign that risk aversion is starting to come back. Or at least some moderation in what has to be considered an unreasonable underpricing of risk these past few months.

Inflation? Forget about it. Dead as a doornail. And the dollar is sharply stronger today too.

A big question will be debated for decades: Whether Mr. Bernanke and Mr. Paulson could or should have kept Lehman Brothers from bankruptcy a year ago this month. They insist today that Lehman was so battered it hadn’t any collateral to secure a Fed loan; their critics say there must have been a way had there been the will. By a 3-to-1 margin, three dozen economists surveyed by The Wall Street Journal reject the Bernanke-Paulson claim that they were legally impotent as Lehman teetered.

The legality of the Federal Reserve bailing out an investment bank is a real issue, quite apart from the other real issue, which is lending on bad collateral. You can finesse the second issue (and it’s an understatement to say that the Fed has been doing so). But broker/dealers are regulated by the SEC, not by the Fed. This is why they had to blackmail Jamie Dimon into acquiring Bear Stearns, before they could lend $30 billion to the merged entity.

As I’ve said elsewhere recently, I give no end of credit to Paulson and Bernanke for going out of their way to observe the law in all respects while handling the crisis. There is indeed an argument to be made that extraordinary times require extraordinary powers, but these guys never stepped over the line. (They did step right up to it.) This is a CRUCIAL point, because it means this is still a democracy.

In Europe, the authorities would have had no qualms about quietly doing stuff with no authorization, and in Asia such authorization doesn’t mean anything in the first place. Axelrod/Obama/Emanuel have already proven their forthright enthusiasm for gliding past the law, as proven in the automaker cases, and that’s particularly worrisome when you consider what could happen in the next crisis.

A friend asked me recently if I thought the AIG bailout was as extraordinary as the automaker deals. But the AIG resolution was structured as an acquisition of 79.99 percent of the common stock, just as had been the conservatorship of Fannie and Freddie in July 2008. That’s legal, and it can’t be said to have been painless for the owners, because AIG was one of the most valuable stocks in the world pre-crisis.

(Of course, there’s an interesting side point, which is the public’s reaction to this. They don’t see that their own mutual funds and 401(k) plans got screwed out of what had been a very valuable property. They only see that the management, the guys at the top of the food chain, got $100 million bonuses.)

The money piped into AIG did indeed flow right back out in the form of fulfillments of margin calls. If that hadn’t happened, we’d be discussing not the failure of AIG, but the failure of Goldman, Morgan, and a thousand other financial institutions around the world who would suddenly have been undercapitalized, and probably in technical default on whole scads of financing covenants. Can you spell M-E-L-T-D-O-W-N?

I don’t know the exact numbers, but I expect that the vast majority of the money funneled out of AIG during the crisis came right back in over the succeeding several months as the market stabilized, and especially after the secular rally in corporate debt that started in March. Keep in mind that cash payments flow between the counterparties of a credit-default swap on a regular basis, depending on market conditions. The Fed extended an $85 billion line of credit to AIG last September, with a supplemental LOC a few weeks later, and to the best of my incomplete knowledge, most of what was drawn down has already been paid back.

It sounds like your solution to the problem would be regulatory forbearance, which the Europeans did in several cases last fall. That basically means having the authorities step in and say, cool your jets and give it a few days before you demand performance on your margin calls. That would certainly prevent extreme liquidity squeezes, but at the cost of encouraging more extremely risky behavior rather than less.

I think that people who get overextended on the margin should get their heads taken off when they fail. And I say that as someone who has been in exactly that situation more than once.

Right after the Lehman failure, like in a matter of hours, Goldman and Morgan Stanley were converted to bank holding companies (which is luckily permitted now under the Gramm-Leach-Bliley Act), so they could legally take money from the Fed. This was portrayed as a voluntary move, but I never found out if Paulson held a gun to their heads. Wouldn’t have taken much persuasion in any case.

There are no systemically important US financial institutions to my knowledge at this point which are not banks or bank holding companies. This includes some industrial companies like GMAC (or whatever name they’re using now) and GE Capital (which I think now goes by the name of “GE Money”). Maybe some second-tier players without a New York presence still have broker/dealer status. Unregulated hedge funds are still outside the Fed’s direct control.

One of the critical things that the pending regulatory changes propose is to put the Fed in charge of ALL financial institutions, including non-depositories. This acknowledges that the shadow banking system (such as it is, nowadays) needs regulation too. This move, of course, is extremely contentious because Congress is full of people who don’t trust the Fed. Which is a funny thing, because I trust the Fed a hell of a lot more than I trust Congress.

The Fed’s job is and always been to act as a lender of last resort in times of financial stress. More precisely, it’s there to lend money at generally high interest rates to institutions needing liquidity, so long as they present excellent collateral. Extraordinary and seasonal credit facilities are very seldom used in normal times, but the simple fact that they exist provides a very important psychological support to the financial system. This matters greatly, because psychology is precisely the reason that isolated panics can turn into liquidity crises.

The Fed, rightly, has always protected the identity of its borrowers and the nature of their collateral. This is information that can and will be misused by competitors, and will lead to even more liquidity problems for affected institutions.

This traditional argument was used by the Fed in defending itself against the Bloomberg organization’s desire to get raw material for news. This time, however, the argument didn’t fly. One suspects that the legal theory used in the court case turned on the Fed’s status as a quasi-independent, semi-governmental authority. While interesting, that side of the question is something of a red herring. And the news stories will certainly talk about how important “transparency” is.

There’s an awfully big difference between liquidity problems and insolvency. The Fed always has lent on excellent collateral because a solvent institution facing near-term illiquidity can be judged a good risk, and the emergency lending does have the effect of stabilizing markets. Usually, the Fed requires US Treasury securities as collateral, and even then it imposes a “haircut” (ie, you can only borrow up to a certain percentage of the value of your collateral).

But this crisis has been unusual in that the Fed began accepting a very different class of collateral, starting with the illiquid mortgage-backed and agency securities it accepted from Bear Stearns. As the economy skidded late last fall, they went even farther, directly purchasing securities in the open market that were backed by such risky things as car loans and credit-card receivables.

In all of this activity, the Fed did something it’s never done before, which is to directly take on credit risk. This isn’t the Fed’s job at all. It’s the job of the banks, but they stopped doing it, so the Fed decided to step in. The alternative would have been to see credit intermediation collapse further, resulting in an even weaker economy.

For the Fed to lend money on highly risky collateral is no longer simply an exercise in guaranteeing systemic liquidity. It’s an attempt to insulate the system from the effects of widespread insolvency and undercapitalization. That’s a very, very different role.

It would be very good to carefully discuss that role and whether it’s appropriate for the Fed have undertaken it, and to continue it as it is doing. We’ll do that another day. Let’s get back to the question at hand.

Should the Fed be forced to fully disclose the borrowers and the collateral in its emergency programs? If this were traditional, strong collateral, I’d say emphatically no, for all the traditional reasons.

But given that something very unusual is going on, I say yes. And I say that with full knowledge of the fact that some borrowers and their trading positions will certainly be harmed as a result.

A question was raised about timing. One speculates that it was chosen carefully to step on today’s release of deficit projections from the CBO, which will probably be even nastier than Christina Romer’s recent statement that we’re going to have $1 trillion yearly deficits for the next decade.

And here it is:

WASHINGTON (MarketWatch) — The U.S. federal budget deficit will total $1.6 trillion in 2009, the Congressional Budget Office estimated Tuesday. At 11.2% of gross domestic product, that will be the highest since World War II. The CBO’s estimate is about the same as the Office of Management and Budget’s estiimate released earlier Tuesday. OMB said the 2009 deficit would reach $1.58 trillion in fiscal 2009.

Generally, there are two objections. First, some are saying we never had whipsaw financial crises before the Fed came to be.

Go back to the 19th century. Without a central bank, every last financial panic turned into a depression. Every springtime, all the money flowed out of New York to the rest of the country (to support the planting season). And every October, it all came back to New York with interest (to support the opera season). Except when it didn’t.

Second, some folks are saying the Fed has overstepped its bounds — that it is acting outside its legal mandate, which is to regulate the currency.

The Fed had at least three tasks going into this crisis. (In this, it’s unlike most central banks, which indeed are responsible only to be monetary authorities.)

The first is to act as a lender of last resort (this charter dates from the Fed’s founding). The second is to ensure the integrity of the interbank payments system (this one was added during the New Deal). The third is to maintain inflation high enough to meet full-employment targets consistent with objectives set by Congress (added in the 1977 revisions to the Federal Reserve Act).

During WW2, the Fed accepted the responsibility to fund the war by monetizing Treasury debt. It threw off this responsibility forcibly when Truman tried to extend it to cover the Korean War in 1951.

Tim Geithner’s current regulatory-reform proposals, if enacted, will give the Fed broad power to regulate any financial business. Part of the call for greater auditability of the Fed is to give Congress more control over them. In theory, this is a good idea, but the Fed intentionally operates without public debate. Ask yourself: do you really want Pelosi, Reid and Waxman to be able to do anything they want to the economy without so much as having to take a vote?

Reports have it that Obama’s pollsters recently suggested that the President try to make the private insurance industry the villains of the piece. This has several virtues: it’s always rhetorically good to have a single, easily-demonized bad guy; and if it works, it conveniently will distract everyone from the fact that the true objective is far deeper than simply to make insurance cheaper for those who currently have none.

(What is the true objective? By God in Heaven, I wish I knew so we could debate it openly. But the true objectives of health reform are one thing Obama and Congress are keeping a deep dark secret. I can read legalese, but I can’t predict the unintended consequences of far-reaching thousand-page laws any more than Nancy Pelosi can.)

So the rhetorical device being used against those of us who would rather know what we’re getting into, as opposed to hoping blithely that the reforms will do what Obama promises, is this: the health insurance market needs some new competition.

In a truly remarkable moment, HHS Secretary Sebelius let the cat out of the bag this morning when she said that, although a public option isn’t a strict requirement, the President is committed to some structure that will, through the miracle of competition, induce private insurance companies to “do the right thing.”

But the President and Congress haven’t proposed anything at all that will increase competition. They could allow interstate marketing of health insurance and pre-empt the many state-mandated minimum coverage requirements that make this a sclerotic and inflexible market.

Instead, what is the proposal? First, a government-funded “public option.” Now, some kind of national system of “co-ops,” which will be functionally indistinguishable from a public option because they will similarly benefit from free capital, grabbed from the taxpayers.

These people aren’t proposing to introduce competition at all. They’re proposing to introduce supply. (If Obama, Pelosi and Waxman actually reasoned that too much supply makes prices fall, they can each have a gold star.)

But the market isn’t adding new supply today, because none is needed. Indeed, if it were legal to produce new lower-cost products without some of the features mandated by current laws, the market would produce that supply overnight.

It’s impossible to add new supply in order to equilibrate a heavily-regulated market at a lower level, unless you subsidize it. The Democrats are simply deluded if they think they can madly dash into a business that’s new to them, and simply figure out how to “do the right thing,” in competition with people who are professionals at health insurance and have been in the game for decades. They’re simply not going to make health insurance cheaper just by eliminating profits (which are necessary because they’re how you pay for capital).

And if the government decides to put its thumb on the scale by creating new supply (either through a public entity or quasi-public co-ops) with capital that is completely cost-free because it was taken from the taxpayers, they can hardly call that competition, can they?

The Obama Administration: Business-management Amateur Hour.

crossposted at Redstate