Krugman, Collapse and Slot Auctions

As I idle my hours away in retirement, I have the luxury of reading a lot and allowing myself to wander wherever my whim carries me. I started off this morning with slot auctions at the New York airports. It puzzles (bothers) me that, with the economy is such perilous shape, this seems to be a priority of the Bush Administration.

U.S. to Auction Slots Soon at New York City Airports

At the end of that article I saw this:

”What is being auctioned is the right to land, or take off, within a half-hour period for 10 years. The reserve price — below which the slot will not be sold — is $10,000 for peak hours and $100 for off-peak, but the president of the auction company, Lawrence M. Ausubel of Power Auctions, said that those numbers were likely to be “well exceeded.” “

You know me -- I was left wondering who Lawrence M. Ausubel is. Turns out he’s a economics professor at the University of Maryland. It appears he’s a kind of Auctions-R-Us industry. That led me to this article in Newsweek:

Gaming The Financial System

”For the past month, they've been spending several very real hours each week hunched in front of computers, competing against each other to sell make-believe assets to a make-believe U.S. Treasury Department, played by Maryland economics professors Peter Cramton and Larry Ausubel.

What's the point of this little academic role playing game? The professors wanted to prove that a relatively obscure financial transaction known as a reverse auction might just be the best way to implement the $700 billion rescue plan Congress passed Oct. 3. “

So the guy with the idea for reverse auctions at the Treasury Department (that has since been dropped) is running the auction for landing slots in New York. In addition, the article goes on to make the assertion that one reason the reverse-auction idea was dropped is that it might actually reveal the truth. A very scary truth.

”"The danger of the reverse auction is its exact purpose, that it would find the price of these securities," says Jerry Driscoll, a former vice president of the Dallas Federal Reserve and a senior fellow at the Cato Institute. “

In case I haven’t made it plain before, anything that says “Cato Institute” (or American Enterprise Institute or Heritage Foundation) is automatically suspect in my opinion. Mr. Driscoll goes on to say;

"The auction would likely have worked with deadly efficiency, and that probably made a lot of people nervous."

In other words, if we actually peeked under the bed, we would find out that there was indeed a monster lurking there. Others have been peeking under the bed. While reading that article at Newsweek, I saw they had done an interview with Paul Krugman . I’ll read anything by Krugman so I clicked on it. (As always, it’s important to note the dates on these articles. Particularly this one -- Dec. 3, 2008.)

Question: ”You say in the book that the world economy is not in a depression and probably won't fall into a depression, though you're a little unsure on that. How has your level of certainty changed in the intervening weeks?


Answer: The last few weeks have been terrible. This was a book written after Lehman, so we knew the world was in big trouble, but what we've seen in the last couple of weeks has been awesomely bad. Things are falling fast. We're probably losing jobs at a rate of 350,000 to 400,000 a month. If you had asked me even three months ago about the chances we'd go above 10 percent unemployment, I'd have said pretty small, but now I'd say one in three. “

On Friday, December 5th, the Bureau of Labor Statistics reported a loss of 533,000 jobs in November. The good news is that Krugman knows the monster is under the bed. The bad news is that it is bigger than he thinks.

I’ve had the time to follow all this and what I’ve seen -- week after dreadful week -- is that the predictions get perceptively worse each week. No one wants to be accused of stoking fears and causing a panic. So everyone has couched their language. They rang the alarm bell, but ever so softly. They’ll ring it louder now -- after the smoke is obvious from the other side of town.

The truly alarming fact is that no one really knows what is happening. I believe Paul Krugman (and some others) are trying to be as truthful as possible -- and I have great faith in their intellectual capabilities. But if they can’t get ahead of this crisis -- and it seems as if they can’t -- we’re in real trouble. If you and I -- the average Americans -- see that the best minds can’t unravel this knot we’ve tied our economy in, then we’re talking about a total collapse of confidence in our economic system.

The fact that our President is arranging landing-slot auctions and signing executive orders about NextGen -- for an industry that will be the first to fold in a recession much less a Depression -- doesn’t inspire me with confidence. How about you ? I think he’s lost the flick. Assuming he wasn’t a 7UP to start with. The danger of a Depression is out there. And it is all too real.

Don Brown
December 8, 2008