When we think about the money supply, we typically think about the Fed's measures of actual money (M1, M2, etc.) along with the various things that can affect how this money sloshes around the system (multipliers, fed funds rates, reserve requirements, etc.). But debt matters too. If banks tighten up on the amount they're willing to loan, that affects the money supply as well.

And it's not just traditional banks. The shadow banking system burst into public consciousness after the 2008 financial collapse, and the best estimates suggest that it's now about as big as the entire traditional banking system. So if the shadow banking system slows down its lending, that affects the money supply too, and due to its fundamental nature the shadow banking system is heavily reliant on ultra-safe collateral. The less collateral there is, the less new debt it will create.

Over at FT Alphaville, Cardiff Garcia summarizes a new Credit Suisse report on exactly this issue, which expands on the previous work of Manmohan Singh. When a particular type of debt gets devalued — when creditors are required to take a haircut on, say, Greek bonds or mortgage-backed CDOs — that entire category of debt is worth less as collateral. Think of it this way: If you hold an ultra-safe bond worth $100, that's $100 in cash you don't need since you can instantly use your bond as collateral to raise $100 in the shadow banking system. But if your category of bond takes a haircut of 20%, suddenly you can only use it to raise $80. That means you're going to hoard an extra $20 in cash. And that's cash that's not available to anyone else. Effectively, the money supply has shrunk. The chart below shows what happened during the financial panic of 2007-08:

Private shadow money dropped off a cliff, but this was made up for by a vast expansion of public shadow money: "A sharp fiscal easing [] created a flood of safe collateral that caused the public shadow money (Treasuries, MBS, agencies) to soar, fully offsetting the contraction in private shadow money (corporate bonds, asset-backed securities, and non-agency mortgages)."

So is this just a history lesson? No. We're still living through it, according to Credit Suisse:

We expect [private shadow money] to contract further in 2012, driven by negative net issuance of financial debt of nearly half a trillion dollars....This potential fall in 2012 is tiny compared to 2008, but it comes at a time when fiscal deficits are shrinking.

The moral of the story is that we're unlikley to face significant inflationary pressure until the total supply of money, both public and private, gets back to its pre-crisis trend level. What's more, as Garcia says, "that does lead to an argument against tightening fiscal policy too quickly: fiscal consolidation tightens monetary policy also."

There's much more at the link, all well worth reading. We live in a wildly complex financial world these days, and we're still groping our way toward understanding it fully. But if the shadow banking story is as important as it now seems to be, public policy needs to take it far more seriously. It's not time yet for austerity.

Via Tyler Cowen.

By Chris Mooney

I want to thank Kevin for the opportunity to post here, and to answer some questions that naturally arise in discussions of my new book, The Republican Brain. Kevin poses a number of them, and poses them well—I have a lot of critics who get the argument completely wrong, so this is a breath of fresh air.

At the outset, I want to clear the air about a few things, where confusion seems too often to prevail. I deal with these nuances in depth in the book, but it will help to restate them here more briefly:

Psychological Needs Do Not Have Substantive Content. This is something I discussed earlier this week in a piece at Salon.com, with respect to the role of authoritarianism in conservatives’ distrust in science.

When you talk about the psychological, physiological, or biological underpinnings of political views, you have to understand that such dispositions are inherently content free. They clearly “push” individuals towards accepting certain views and certain arguments that feel right to them—thus, a person highly sensitive to fear threat may be less likely to worry about civil liberties in the wake of 9/11, or to naturally feel support for the death penalty. But the precise views that feel appealing to such a person would also be very different in the U.S. at the present moment than they would be in, say, China. And they would also change over time in the U.S. itself.

This is something that we must always bear in mind; and therefore, when I talk about a political phenomenon like U.S. conservatives denying science or fact, you are inevitably talking about a mélange of underlying psychology—which appears to have some universal human elements to it—and the specifics of our unique political culture and discourse.

Nevertheless, certain psychological traits or needs do match up well with certain ideologies, on average. The research shows this repeatedly.

We Are Pre-Disposed To Have Certain “Political” Traits; But That Doesn’t Make Them Destiny. There is also a confusion about the issue of, essentially, determinism. I’m saying that our political views are partly the product of “nature,” and then showing the role of psychology, physiology, and even some genetic influences. However, none of this stuff is deterministic; and the account is not reductionist. Even when it comes to genes, which do seem to influence our political views, the influence is indirect, statistical, and there is a feedback with the “environment” at every single step of the way.

When Kevin uses the word “innate” in his piece, which he does repeatedly, I worry that he may not be crediting this complex reality. Other people use phrases like “genetically wired” or “hardwired,” which are flatly wrong.

With all that in mind, then, let’s go on to answer Kevin’s questions. He says he has three reasons for being skeptical of my argument. In particular, he isn’t convinced that conservatives naturally tend towards being anti-science.

1. Just a Few Issues? First: Kevin notes that conservatives only really bash science today on two issues, evolution and climate change. I agree that these are the two leading issues of the moment, but doesn’t Kevin remember stem cell research? It was quite prominent up until recently, and in the 2004 election it led the pack of science issues. And doesn’t contraception count as a science issue? In my book I detail numerous cases of conservatives denying science whenever it has something to do with reproductive health, contraception, or abortion.

And for that matter, who said it was just science we’re talking about? I deliberately subtitled the book “The Science of Why They Deny Science—and Reality” so as to include belief that President Obama is a Muslim, or a socialist, or wasn’t born in the United States; the huge array of false claims about health care reform and the economy; falsehoods about American history, and much else.

Precisely because we are talking about something that is partly dispositional about conservatives, there is no reason to think that their denial of reality would begin and end with science issues. Rather, there is every reason to think that this behavior—springing in part, I argue, from psychological traits like more rigidity or fixity of views, less openness to new information, more authoritarianism, and so on—would infect all areas where they had an emotional stake.

So when Kevin says “I really don’t think you need the sledgehammer of innate cognitive traits to explain” conservatives denying science on evolution and climate change—well, the picture is much broader than those two issues. And again, I’m wary of that word “innate.”

2. Too Many Steps? That’s Kevin’s first objection; to answer his second, I need to hearken back to my “Psychological Needs Do Not Have Substantive Content” point.

Kevin asks, “What’s the cognitive trait that makes you anti-science? Not just skeptical of one or two particular results, but skeptical of science in general.” Well, there’s no such trait—because, again, these traits are content free, and Kevin is using the word “science” in a way that denotes content (a body of knowledge, a methodology, and so on).

It’s totally possible that science could be framed in a way that an authoritarian conservative would support. Maybe that was what occurred under Stalin, when the Soviet regime touted the anti-genetic pseudoscience of Lysenko. However, it isn’t very likely that, in a democracy like ours, science and basic conservative traits are going to get along very well, for very long. They are, as I explain in Salon, “just such deeply opposed ways of thinking—and being. You could argue that the clash between science and authoritarianism dates all the way back to the time of Galileo, if not farther.”

The point is that science and liberalism alike are rooted in a style of thinking that is nuanced, complex, tolerant of uncertainty. These characteristics don’t mesh so well with the body of traits—quick-thinking, decisiveness, less openness to experience—that tend to go along with conservatism. So while in certain contexts you might find allegiances, there is a deep seated tension there that, in the long run, would tend to push them apart.

3. Liberals Do It Too. There’s no denying that liberals have their own occasional issues with science. But do they have the same issues, or the same kinds of issues, and do they deal with them in the same way? I don’t think so.

Kevin cites the “science wars,” noting that they emerged from the academic left. Yes, but what a classically liberal way of challenging science, replete with incomprehensible jargon (“deconstruction”), layer upon layer of nuance and complexity, and more than a whiff of “hey, over here” attention seeking.

The “science wars” were liberal in another way, too—faddish. Temporary. Fleeting. They didn’t last, we moved on to other things. Meanwhile, conservatives are going on a century of active anti-evolutionism in the United States, and climate change denial is now also decades old.

Similarly, I don’t think liberals are nearly as opposed to “sociobiology” or “evolutionary psychology” as they once were, because again, liberals change and shift their views more easily. I, as a liberal, find such explanations essential.

Kevin concludes with a series of statements I utterly agree with, at least up to the end:

There's a complex interplay of biology and culture that produces liberals and conservatives in the first place. But once a conservative movement is in place, it's inevitable that it will attack conclusions it doesn't like and institutions that aren't on board with the conservative agenda. That includes the institutions of science to some extent and a few specific scientific results to a very large extent. But that's just common sense. I don't think you need evolutionary psychology to explain it.

I would put it a little differently. It’s not really that you need these factors to give an explanation; people give the sorts of explanations featured here all the time. Rather, it’s that you can’t ignore dispositional or psychological factors any longer if you want to truly understand politics. You have to start to see beneath the surface.

All the studies discussed in my book show that these factors are having a substantial effect on political views and behavior. The burden of proof is really on those who would continue to discount them.

Is a two-state peace settlement between Israel and the Palestinians in the West Bank still possible? Zvika Krieger says it might be, because most of the large Israeli settlements are fairly close to the 1967 green line. In order to create a viable Palestinian state, Israel would have to uproot a fair number of the more distant settlements, but it wouldn't have to uproot a large number of people. Robert Wright pushes back:

OK, fine. But, according to Krieger's numbers, this would still involve uprooting 125,000 settlers! If anyone considers this a readily doable project, I recommend going to Hebron, where fewer than one percent of those 125,000 live, and asking the settlers whether they'd go peacefully. Compounding their assured intransigence is that the Israeli army, which would be doing the extracting, is itself increasingly populated by intensely religious settlement supporters, some of whom say they won't carry out settler-eviction orders.

All of this helps explain why last week at the J-Street Conference, the Israeli scholar Menachem Klein, who was an adviser to the Barak government, opined that a two-state deal could spark a civil war within Israel. "Yitzhak Rabin was assassinated during an interim agreement when he had not evacuated a single settlement," he said. "Israelis will use arms to resist an agreement even if there were a referendum supporting it."

But this is almost beside the point. Warning how hard it would be to uproot the settlements is like warning how hard it would be for the American government to confiscate the TV sets of all citizens. No government is going to try to do it anyway!

But a one-state solution is hardly possible either. Even now, Arabs make up about 30% of the population of a combined Israel and the West Bank. In 50 years that will be up to 40% or so. At the same time, about a third of the Jewish population will be ultra-orthodox. I don't think anyone believes this is a recipe for a peaceful democratic state.

So there is no longer any plausible future except for perpetual occupation. Welcome to hell.

From Time's Belinda Luscombe at the end of an interview with South Carolina governor Nikki Haley, who was born and raised as a Sikh:

In New York City, which you're visiting for a couple of days, a lot of our taxi drivers are Sikhs. If you get one, are you going to give him a slightly bigger tip?

This is outrageous. Why does Luscombe casually accept the gender normative view that all taxi drivers are male?

(By the way, Haley answered that she gives the same tip to everyone. She also quite charitably refrained from slugging Luscombe.)

This is an outrage. On Tuesday Judge Jerry Smith, incensed over President Obama's stated hope that the Supreme Court wouldn't overturn his central domestic achievement, gave the Justice Department a homework assignment. And he was very clear about that assignment. He wanted to know if Obama supports the concept of judicial review, and he wanted the president's position explained in "at least three pages single spaced, no less." Well, the letter is out. Here it is:

Does that look like three pages to you? Half of the first page is pure filler, there's only one paragraph on the last page, and the margins are obviously extra big. This is at most two single-spaced pages.

The arrogance of this administration and its contempt for the rule of law truly know no bounds. I demand a bench warrant for Obama's arrest.

Andrew Sullivan says Cato's David Boaz has a point today. Here's Boaz:

The arbiters of appropriate expression in America get very exercised when conservatives call Barack Obama a “socialist.” They treat the claim in the same way as calling Obama a Muslim, Kenyan, or “the anti-Christ.”

But headlines this week report that President Obama accused the Republicans of “social Darwinism,” and I don’t see anyone exercised about that. A New York Times editorial endorses the attack.

Is “social Darwinist” within some bound of propriety that “socialist” violates? I don’t think so. After all, plenty of people call themselves socialists — not President Obama, to be sure, but estimable figures such as Tony Blair and Sen. Bernie Sanders. Members of the British Labour Party have been known to sing the socialist anthem “The Red Flag” on the floor of Parliament.

But no one calls himself a social Darwinist. Not now, not ever. Not Herbert Spencer. The term is always used to label one’s opponents. In that sense it’s clearly a more abusive term than “socialist,” a term that millions of people have proudly claimed.

This is more than a little disingenuous. Yes, millions of people have proudly claimed that they're socialists. Lots of people proudly claim they're Kenyans too. And Muslims. In American national politics, however, being a socialist is a kiss of death and Boaz knows it. Still, being called a social Darwinist is pretty unsettling too, so this is a trade I'd be willing to make. If conservatives will stop calling Obama a socialist, then I agree that he should stop calling them social Darwinists. I'll be waiting to hear back on that.

This little spate of name calling is only modestly interesting, though. Far more fascinating is this from Boaz: "Those who deploy the charge [of social Darwinism] are, first, falsely implying that Republicans support radically smaller government, which neither Ryan’s budget nor any other Republican plan actually proposes."

Say what? The Ryan budget very plainly slashes domestic spending on everything other than Medicare and Social Security by absolutely whopping amounts. As the CBO's analysis makes clear, Medicaid and CHIP (children's healthcare) would decline from 2% of GDP today to 1% of GDP in 2050, and everything else in the domestic budget would decline from about 8% of GDP to 1-2% of GDP. That's prisons, border control, education, the FBI, courts, embassies, the IRS, FEMA, housing, student loans, roads, unemployment insurance, etc. etc. It's everything. Whacked by about 80% or so. If that's not radically smaller government, what is?

Ken Rogoff writes today that the euro is probably doomed:

The good news is that economic research does have a few things to say about whether Europe should have a single currency. The bad news is that it has become increasingly clear that, at least for large countries, currency areas will be highly unstable unless they follow national borders. At a minimum, currency unions require a confederation with far more centralized power over taxation and other policies than European leaders envision for the eurozone.

Rogoff provides a good primer here, explaining that a single currency works for the United States because (a) workers can freely move from depressed areas to more vibrant ones, and (b) national tax policy automatically shifts resources from rich areas to poorer ones. This keeps the entire country in rough balance even though some states have better economic growth and more highly paid workers than others. States that run "trade deficits" with the rest of the nation will never get too far out of whack.

But Europe has neither of these things. Technically, workers in the EU can move freely between countries, but in practice language and cultural barriers are far stronger than they are in the U.S. Spanish workers in Seville just aren't very likely to move to Frankfurt even if lots of jobs are available there. And although Europe does engage in a modest level of fiscal transfers, it's nowhere near big enough to make up for the persistent imbalances between the core and the periphery. As a result, countries that run trade deficits with the rest of Europe can very decidedly get too far out of whack and end up in crisis mode.

So what's the likelihood that the euro will survive? Rogoff says that without "further profound political and economic integration" the euro might not make it to the end of the decade. But what are the odds of that integration happening? For what it's worth, the punters at InTrade don't think it's very likely. They figure there's a 21% chance of a country leaving the euro by the end of 2012, a 35% chance by the end of 2013, and a 43% chance by the end of 2014. There are no bets available beyond that, but the trend is pretty clear. Not many people would be willing to put money on the chances of the euro area staying intact by 2020.

Neither would I. Free movement of workers in the eurozone is constrained not by law, but by language and custom, and there's just no way to speed that up much. This means that for the foreseeable future fiscal integration would have to bear the full weight of making the euro into an optimal currency area, and it's really hard to see the rich countries of Europe being willing to provide the required level and persistence of aid to the poorer countries year after year after year. It's not impossible, just really unlikely. There's a lot of political reluctance to give up on the euro, and a lot of technical reasons why breaking up the eurozone would be really hard. But even so, I'll be at least a bit surprised if it's still around in 2020.

Yesterday Mitt Romney complained that President Obama is "setting up a straw man" in his campaign attacks, an accusation sure to mean absolutely nothing to almost everyone and to be unpersuasive to those few who do know what he's talking about. But that's OK. Obviously Romney is at the point where he's just trying out campaign themes to see which ones stick. That one probably won't (too cerebral for the base, too dumb for the chattering classes), but his "hide and seek" charge, unveiled in the same speech, might have more legs. That's the accusation that Obama is cleverly hiding his true second-term intentions and plans to surprise us all when he's reelected by unveiling an (even more) shocking pro-socialist, anti-Christian, soul-destroying agenda.

Most normal people hear this and think "Huh?" What's Romney talking about? Well, this is one of those alternate reality versions of Obama who lives in conservative fundraising letters. Paul Waldman explains:

You see, as far as base Republicans are concerned, there are two kinds of Obama policies. The first kind is the freedom-destroying, Constitution-desecrating, pulling-us-toward-socialist-dystopia awfulness. Like health care reform, or repealing "Don't Ask, Don't Tell." The second kind is the long con, the things he has done to lull the American people into a false sense of security before the second term comes and he unveils the horror of his true agenda. Like the way he has done nothing to restrict gun purchases, which only proves just how diabolical his plan to take away every American's guns really is.

The question is, what does this mean? This is base catnip, not rhetoric designed to appeal to independents, who think this is crazy talk. Paul suggests that it means Romney's long-awaited general election shift may be harder to pull off than we think: "At a moment when he's got the nomination pretty well locked up, Romney is still trying to assure conservatives that he's one of them, that he hates who they hate and fears what they fear. That 'pivot to the center' could be a while in coming."

This is going to be a continuing Romney problem, all right, amplified by the fact that keeping the Republican base on board requires more than just dog whistles these days. They really want to know that you're on board with all their fever swamp notions of who and what Obama really is. They won't accept halfhearted sentiments. They want the full monty.

Still, these are early days. Romney has plenty of time to throw enough red meat to appease the base and get them solidly on his side. We have short attention spans these days, and if Romney does this for another couple of months, and starts his pivot around June or so, that should be plenty of time. By August no one will even remember he ever said this stuff.

Prison in Paradise

There's no political spin to this story at all, but I'm putting it up anyway just for its entertainment value:

The tiny jail on Catalina Island is hardly Alcatraz. Just ask Frank Carrillo. The pro golfer turned jewel thief couldn't believe his luck when he was moved out of his bleak Men's Central Jail cell in downtown L.A. and allowed to do his time on the sunny tourist isle.

But things got even cushier when he met a Los Angeles County sheriff's captain interested in shaving a few strokes off his golf game. Carrillo said Capt. Jeff Donahue escorted him in a patrol Jeep to a hilltop golf course last summer. There, dressed in his yellow inmate jumpsuit, Carrillo said, he gave the captain pointers on how to improve his swing and reduce a double-digit handicap.

....Carrillo, who compared his time in jail for multiple felonies to "hitting the lotto," thought Donahue should be emulated, not investigated. "He was amazing to me," said Carrillo, who believes the captain benefited from his lesson.

"He kind of has this swing that's old school and risky, but he hits it every time," Carrillo said in a phone interview. "I would probably say he's a 14 or 15 handicap. Not too bad."

No need to say more. You had me at "pro golfer turned jewel thief." I smell quirky buddy movie here — maybe with Owen Wilson as the roguish golfer/jewel thief and Morgan Freeman as the gruff but likeable sheriff. Let's do lunch.

Are conservatives more anti-science than liberals? In The Republican Brain, Chris Mooney says they are, and he says this is due to innate temperamental differences between left and right. On Friday I wrote a short post saying I was skeptical about this, and today I'm going to spell out my objections in a little more detail. Tomorrow Chris will reply.

I should make clear at the start that I'm not skeptical of the idea that there are fundamental differences in worldview that drive people to become political liberals or conservatives. Far from it. In fact, I'm on board with this idea completely. I'm quite persuaded that there are a small number of basic cognitive traits that drive a lot of our political differences, and that most of the time we're not even aware they exist. These traits developed via interactions of both biological evolution and cultural evolution, and they've been confirmed by a wide body of research (anthropology, MRI scans, psychological testing, etc.).

So why am I skeptical in particular about the idea that conservative attitudes toward science as a discipline arise from one or more of these innate cognitive traits? I have three reasons.

Reason the first: When you read arguments that conservatives are anti-science, the bill of particulars is often fairly long. But really, there are only two big-ticket items: evolution and climate change. The rest is either small beer or highly arguable. But really, how central to conservative thought can these two things be? After all, mainstream conservative Europeans don't deny climate science and conservative Catholics don't deny evolution. 

What's more, conservative suspicion toward both evolution and climate science is pretty easy to explain. Doubt about evolution is obviously bound up with religious belief, which makes it little more than a subset of the fact that conservatives tend to be more literally religious than liberals and American conservatives tend toward the evangelical Protestant strain of literalism.1 And doubt about climate change is obviously motivated by a dislike of the business regulation that would be necessary if we took climate change seriously. So that's just pure self interest. I really don't think you need the sledgehammer of innate cognitive traits to explain either of these beliefs. Simpler explanations will do.

Reason the second: There are too many steps involved. If you tell me, say, that conservatives tend to value in-group loyalty more than liberals and are more sensitive to outside threats, I don't have a hard time buying the idea that this produces high levels of nationalism and support for the military. That's a pretty simple extrapolation. But what's the cognitive trait that makes you anti-science? Not just skeptical of one or two particular results, but skeptical of science in general. You can probably invent a just-so story with two or three steps to get there, but I'd take it with a big grain of salt.

Reason the third: Liberals do it too. Anyone remember the science wars of the '80s and '90s? That brawl didn't get the headlines that climate change and evolution do today, but it was just as big and just as important. And in this case, it was the academic left that was vitriolically opposed to a new and emerging science. In particular, they were opposed to the emerging science of—ta-da!—innate cognitive traits and their effect on human behavior. And the reason the left was opposed to this science (and still is, to some extent) is because they didn't like some of the conclusions you get when you acknowledge that human cognition is partly determined by biology. This isn't a perfect analogy to climate skepticism, which has grown even as the science has become more certain, but it shares a lot of the same features.

Movement conservatives are interested in building institutions that provide their followers with reliably conservative answers to social and political problems. That's hardly a surprise. Likewise, they're interested in delegitimizing institutions that are either liberal or neutral and therefore don't provide their followers with reliably conservative answers. That's also no surprise, and it explains why they attack the institutions of science, mainstream journalism, entertainment, and academia in general.

There's a complex interplay of biology and culture that produces liberals and conservatives in the first place. But once a conservative movement is in place, it's inevitable that it will attack conclusions it doesn't like and institutions that aren't on board with the conservative agenda. That includes the institutions of science to some extent and a few specific scientific results to a very large extent. But that's just common sense. I don't think you need evolutionary psychology to explain it.

1The deeper religiosity of conservatives is probably due in part to some innate cognitive trait. But that's a separate thing. Skepticism of evolution is just a subset of that cognitive trait, combined with a healthy dose of path dependence within American Protestantism, not the result of some kind of generalized anti-science trait.