March 13, 2010
In Markets We Trust
Larry Kudlow knocked it out of the park last night. Like the White House releasing bad news on Friday night, I fear it will vanish into the aether. He hat-tipped Barry Ritholtz on the show but I do not see anything to link to in Ritholtz's blog or Kudlow's.
Thursday, more evidence came out that Lehman Bros. was "cooking the books" with the delightfully named accounting trick Repo 105. In short, Lehman moved a lot of paper off-balance sheet to lower its apparent leverage. Curiously, it was high grade debt that they could park at a hedge fund, not so much hiding the toxic assets.
The point Kudlow makes (and attributes to Ritholtz) is that only the short sellers discovered this chicanery. Kudlow listed the soi disant watchmen who missed it:
- Ernst & Young -- nope, nothing to see here folks!
- The New York Fed, chaired at the time by one Timothy Geithner
- The layers and layers of bullshit and suffocating regulations dictated by SarbOx
- The SEC
So, let me get this straight. No government regulator or oversight board got a whiff this was going on. Or worse, problems were found and were hidden. One of the last of the Big Eight accounting firms signed off on a Sgt Schultz audit.
And yet, at the same time, those who make a living trading Financials (and a pretty decent living I am led to believe) realized that it smelled funny. They sold short -- adding information to the market and positioning themselves to make a tidy profit if they were right (and limitless loss t'were they not). These people found the problem, caught it, and shut the company down. No regulator, no legislator, the aggregate wisdom of the market discovered and corrected the problem, while the regulators and regulations did nothing but add deadweight to all firms.
So how are we making sure this doesn't happen again? More regulation of course! A bigger role for Timothy Geithner to "manage" systemic risk: to bring that New York miracle to the whole country!
Oh, yeah, and propose a rule to ban short sellers.
Stop. World. Me want off.
Well, as I was telling a friend Friday, short-selling is the big scapegoat. Not only is it a legitimate investment tool, it hardly does what its detractors claim it does. However, the SEC in particular needs a scapegoat because all its regulations (especially record-keeping, which I can personally attest to) and all its audits failed to do the job the SEC claims as its mission. The rightful outrage at the SEC's incompetence with Bernie Madoff, when they had a smoking gun, was quickly forgotten.
In and of itself, short-selling had and still has nothing to do with "attacking" financial companies' stocks so the prices would go down. When you buy shares of XYZ, you have no idea if the person is selling shares he currently owns or if he's shorting. You're simply buying whatever shares are offered.
So when you short XYZ, your motive stays with you, and your buyer implicitly thinks the shares are going up -- otherwise why would he be buying? (Barring that he sold someone some uncovered calls and had the market move against him, but this is a tiny minority of cases.) Thus both sides cancel each other out, just like so-called "speculators" weren't driving up oil prices.
If blame lies with short-sellers, it should also lie with others who owned the shares and dumped them. Even though John Q. Public felt Lehman was going down the tubes, he was sending just as much of a signal to the markets when he placed the order to sell it all. Why isn't the SEC going after owners also, for "market manipulation" and other nonsense?
The reason financial companies' stock prices went down is very simple: buyers weren't willing to pay the asking prices. That's it. Buyers who were aware or prescient of those companies' problems, or even just guessing, wouldn't budge at current market prices, so sellers had to keep bidding lower. It's buyers who send the strongest signals, because they are ultimately the ones in control of prices.
Mises said, "The captain is the consumer." In stock exchanges, buyers are "the consumer."
One thing I mentioned to my friend: what if Larry Wildman had made good with his threat to dump Anacott to "burn" Gekko? In real life, any knowledgeable investor would have laughed to himself at such a wonderful opportunity. Once Wildman dumped his own shares, Gekko should have been the first to start buying!
Posted by: Perry Eidelbus at March 14, 2010 7:02 PMExcellent post, JK! It's like blaming the canary:
"Gentlemen, we've noticed a high correlation between canaries dying and mine disasters. Everytime the canary dies, we have a disaster. Clearly, we need to get rid of the canaries."
"Yeah, damn canaries can't be trusted."
Next, the New York Times runs a front page expose' on the Republican canaries.
Posted by: Boulder Refugee at March 14, 2010 7:30 PMExcellent Post, that I overquoted since most people never link through. Thanks!
Posted by: Terri at March 15, 2010 8:47 AMFebruary 11, 2010
Do Love the Internet
Want to be an Econ geek or just dress like one?
Blog Friend Everyday Economist embeds a cool YouTube.
Federal Reserve’s monetary policy actions is to use a graphical representation of the market for reserves. Frederic Mishkin’s textbook on money and banking is an excellent print resource. Meanwhile, Mark Thoma illustrates the model, and Fed policy changes, in this YouTube clip:
February 10, 2010
Value
Many people still cannot get their heads around the idea of creating wealth ex nihlo. It's easier to see it in the software business, but people always look at an item and confuse its marginal production cost for its value.
Here's an abstraction for you: WSJ Tweets that it is close to a deal to sell its stock indices.
CME Group Inc. was on Wednesday close to finalizing a deal to purchase Dow Jones & Co.'s stock-indexing business, said people familiar with the matter.The price was expected to be greater than $600 million, said one of these people, though an exact price couldn't be determined.
Six hundred million for a list of stocks and permission to use the name. I hope we do not kill this wonderful country.
Careful, my friend, or you'll give the socialists ideas. Clearly these are evil capitalist vultures who are stealing $600 million from the hands of their customers!
Unfortunately the NYSE operates under a government charter, so the $600 million is inflated because of a lack of competition. However, your point and its basis are no less valid. The NYSE originated because people needed a trustworthy means of exchanging information and property. As in all things, the state's sanction didn't bring something into being: the "thing" already existed or was made possible before the state declared it.
Posted by: Perry Eidelbus at February 11, 2010 10:23 AMFebruary 4, 2010
Quote of the Day
We are all Austrians now. Over the past few weeks, in Los Angeles, San Francisco, Sacramento, New York City, and London, I've run into more and more institutional investors whose economic and financial views either knowingly or unknowingly reflect the influence of the Austrian School of Economics. I am in Zurich today and Geneva tomorrow. … How do you know if you are an Austrian? Here is a simple test. Answer yes or no to the following question: "I believe that this will all end very badly." -- Ed Yardeni (via James Pethokoukis)
January 29, 2010
Idiotic Idea of the Day
The Refugee has decided to nominate a new category for daily award: Idiotic Idea of the Day (IIOTD). Trust him, this is going to be big.
Today, Barack Obama announced that a $5000 credit would be given to small business for each "net new" job created in 2010. Which really goes to show how little the preznit (credit to Keith) understands about running a business.
So, I'm a small businessman (and The Refugee has been one): Am I really going to hire someone at $60,000 (or pick a number) this year and every year thereafter just to get a $5,000 tax credit? Heck no. I would hire said person based on the economic business justification and a $5,000 subsidy would not even be a tipping point. However, I would gladly take the credit anyway thankyouverymuch.
So, how many jobs will this credit create that would not have been created without it? Zero. How much will it add to the deficit? About $33 billion. IIOTD.
By remarkable coincidence, my wife and I were at a business meeting during the Wednesday speech - we'd just filed incorporation papers for a small business. We'll be creating (not "creating or saving") ten jobs. We're actually DOING something to stimulate the economy. Didn't even know about the $5,000 credit - but whatever part of that is left over after the offsetting tax increases and health coverage increased will be donated to the campaign funds of business-oriented, free-market candidates for office.
On the other hand: opening an escrow company in California's depressed real estate market? I may be guilty of the next Idiotic Idea Of The Day.
Posted by: Keith Arnold at January 29, 2010 5:59 PMWhere will you get enough ideas to populate this new feature, br? Is it sustainable?
Posted by: jk at January 29, 2010 6:14 PMOK, KA (like the moniker?), here's the dirty little secret: you have to have enough taxes due to cover the tax credit. In other words, if you lose money or break even, like most start-ups do for the first few years, you have no taxes payable and therefore nothing to offset the credit.
BTW, got any openings? I might as well be the first to apply!
Posted by: Boulder Refugee at January 29, 2010 6:26 PMNevertheless, I'm sure the preznit will happily take credit for creating those jobs! What a guy...
Posted by: Boulder Refugee at January 29, 2010 6:28 PMMaybe I ought to tell the Preznit I'm creating these jobs in spite of him, not because of him.
Nuance.
Posted by: Keith Arnold at January 29, 2010 6:46 PMJanuary 28, 2010
Economics for Progressives
I went looking for reasons why the GOP's Big Tent actually gets bigger when Progressives are kicked out of it to advance a discussion with jk and found this gem. I'm not sure yet how it relates to my premise but I have to share it, for it seems to tie in with several internecine issues around here.
The admitted Progressive author, UT-Austin professor of [not specified] argues that not only should Medicare and SoschSecurity NOT be slashed (in the name of deficit reduction or anything else) but that large, long term deficits are actually ... desirable.
So the fetish of long-term deficit reduction is politically poisonous -- and economically pointless. In reality, we need big budget deficits. We need them now. We need bigger deficits than we've got, to stabilize state and local governments and to provide jobs and payroll tax relief. And we may need them for a long time, on an increasing scale, and in the service of a sustained investment strategy aimed at solving our jobs, energy, environment and climate change problems. To pretend that expansionary policies are needed only for now, gives all this away.
But don't worry, boys and girls, nothing bad will happen.
The CAF coalition concedes that "long-term deficit reduction" is vital. But why? No reason is given. Are they worried about a threat of inflation? If so, why not look at interest rates? Last December's average 20-year Treasury bond rate was 4.40 percent -- lower than it was before the crash sent deficits soaring. Clearly, the markets aren't worried -- or the government would have to pay more to borrow. Equally obviously, the markets aren't worried about "default" or "national bankruptcy" either. Investors know those concepts don't apply to the government of the United States.
[Pause until your jaw returns to normal position.]
I mentioned tie-ins. This guy sounds like an uber-Progressive, and he's bashing CAF for doing the right thing for the wrong reasons. Sound familiar?
I said McCain should be opposed in the AZ GOP primary because he won't support the "massive structural reform" that it will take to rescue America economically. Slashing Social Security and Medicare are two such reforms.
If your jaw drops, you've been away from Boulder for awhile. I'd consider most of those arguments mainstream. Wrong, yes, but mainstream. Paul Krugman would make most of those statements and he was awarded the Nobel Prize.
We're stuck in label hell. I have tried to use the word "progressive" as others use "liberal" in an (speaking of quixotic) attempt to rehabilitate liberal to its Mises definition.
Taking ka's cue and using progressive in the TR-Wilson mode, I think it describes the maverick-y Senator from Arizona pretty well. It ain't limited government. Conversely, McCain has been tough on spending and earmark reform. His Presidential campaign included some good free-market ideas. I fear a party that could not find room for Senator John McCain would be a small party.
"...We need bigger deficits ... to provide payroll tax relief..."
Wait, whoa - what? We need to go deeper into debt through more government spending, one benefit of which would be... lower taxes?
I'm just a tyro on economics, but is he smokin' what I think he's smokin'? To quote Ricky Ricardo, he's got some 'splainin to do, because I don't get it. Might one of you smarter guys be able to help out?
Posted by: Keith Arnold at January 28, 2010 4:39 PMWOW Did I lose calibration sometime in the third hour of the SOTU last night? I've read it twice now and still don't see anything in here you would not read in any issue of TNR or the NYTimes.
And, maybe I am misreading Keith, but I think he refers to the one stimulus idea that I could actually accept: a large reduction (I'd say complete holiday) from payroll taxes for employer and employee.
An extremely attractive GMU grad student was pushing this last year in a YouTube clip (if you share my love of economics, you might remember her...) For the same price as the craptastic porkulus bill, she claimed, we could give everybody a year off payroll taxes. That would create jobs.
And the pain of expiring it would advertise the underlying pain of withholding. Don't know if the numbers add up, but I have great faith in GMU's economists.
Amassing additional deficits AS A RESULT OF a payroll tax holiday is one thing (but the obvious answer "stop spending so damb much money, too!" prolly doesn't occur to such sophisticated, nuanced thinkers); amassing greater deficits IN ORDER TO provide tax savings is quite another. If I'd had enough sense to major in Economics instead of English, maybe I could get past what could just be a crappy grasp of syntax and not actually faulty cause-and-effect thinking.
Still, our budget problem is a spending addiction, not a shortage of income. If Uncle Sugar didn't have such a love for grabbing the check...
That's it - Uncle Sugar needs an intervention.
Posted by: Keith Arnold at January 28, 2010 7:27 PM'xactly. "IT'S THE SPENDING, STUPID!"
What I'm slack jawed about is not the list of "mainstream" ideas, but the last one specificallly: "...these concepts don't apply to the government of the United States." Do they think China's lending wealth, patience and cooperation are limitless?
It's just my opinion mind you, but I say there's plenty of room in the Tent for McCain and other Progressives, just not for their ideas and values.
Posted by: johngalt at January 28, 2010 9:36 PMJanuary 26, 2010
Everything I believe in one picture
Here's a chart for the Prosperitarians:
This is why I rail at those who would take up back to the caves. The "live simply so that others may simply live" movement misses this. Curiously, I think the Objectivists do as well. I suppose I understand -- after repetitive beatings -- that no concept of collective good can be reified, but I still find this to be a powerful selling point. Everybody gets happy as we move down the X axis toward modernity.
Hat-tip: Scrivener
Dagny's working overtime to help America's subjects comply with the brutal rules of the illegal and corrupt IRS so you'll have to settle for my disjointed ramblings instead.
What I recoiled at was your suggestion that Objectivists (or Randians) are somehow against, as suggested by the chart, industry, wealth, technology and specialization or population growth. I didn't realize you were rehashing the old argument of society's benefit being the cause or the effect of our political system. The brothers, ka* and nb**, did a good job of defending dagny's overall point using both general and specific arguments. But I think none of us would disagree with the chart. What it shows us is that technology and human ingenuity is where true progress comes from - not from Progressives. (More on that later.)
* "ka" as in "kick-ass!" Rock on, brother.
** Nuthin' wrong with anonymity. I presume someone knows your identity in the Matrix.
I thought ka*** was the character in "Batman Begins" that you like...
Anonymity is a good choice in this company, nb, stick around. I have your real email but will protect it to my grisly death if Vice President Cheney comes for it. But if there is a personal tie I am not aware of it.
Posted by: jk at January 27, 2010 1:09 PMKeith and NB, thanks for making the very point I did some months back. "Public good" is too imprecisely thrown about, and Bastiat would remind us to look at who's paying for it in the first place.
Fireworks and beautiful vistas could be called public goods, but is someone being made to pay for them against his will? "Non-rivalrous and non-excludable" is only half of the picture, particularly when the so-called "public good" is government's way of crowding out a viable competing good in the private sector.
"The military" is most certainly not a public good, as I pointed out, even by the simplistic definition (because it's consumption is definitely rivalrous). It's a service I'm coerced into paying for but hope not to need to use.
"Free trade" isn't considered a public good, yet it does make "society" better off.
Posted by: Perry Eidelbus at January 27, 2010 2:42 PM"Curiously, I think the Objectivists do as well."
Now jk, I have no idea where you got this.
Posted by: Perry Eidelbus at January 27, 2010 2:47 PMClarification: I think that the pantheists will deny that progress was made. Sure we used to freeze in caves -- but they never had to watch commercials of view the decadence in Walmart*
Objectivists, I feared, would not let me celebrate this collective good. For the record, I mean good in the most abstract usage. I celebrate that freedom, innovation, modernity, trade, comparative advantage and the infield fly rule have made us all richer and less prone to morbidity. But I was concerned that celebrating this "collective good" would attract disapprobation from the Three Sources Objectivist community.
So I'll leave you all with a Democrat apology: "If I worded it poorly, I apologize to those hurt by their misunderstanding of my comments."
No offense, you know, but that's quite a misunderstanding.
When a collectivist talks about "collective good" or "public good," you know he's talking about the forced, shared equality of poverty and state oppression.
An Objectivist would never have a problem with you living your life on your own terms, harming no one else without consent. If you asked him why he didn't object to the collectively good situation of society, he would reply that you're looking at an abstract average of individuals and their voluntary networks.
Posted by: Perry Eidelbuse at January 31, 2010 9:45 PMJanuary 15, 2010
Another Krugman Smackdown
Ahh, my favorite argument. The Europhiles versus the forces of liberty and reason.
We started with Mankiw vs. Krugman. Hopping over the pond to pick up his Nobel, Krugman looks around his five star hotel and says "Europe is doing great!" Mankiw lists the per capita GDP numbers and begs to disagree.
Megan McArdle goes toe-to-toe, anecdote-to-anecdote with Krugman and says something I've always seen and argued. People go to Europe for two weeks and fall in love with its aesthetics, charm, and history. And it's great. When you spend more time or look a little deeper, you see that they are poorer than us. Period, the end, QED.
I don't want to sound as if I'm saying Britain's a terrible place--it's lovely, and I miss it. But the amount that people are able to consume is much less than the amount Americans are able to consume, and many of the things they forego make real difference in things like personal comfort. (Based on my admittedly limited sample of British mattresses, they must be unimaginably hardy sleepers). Consumption isn't everything. But it is something, and that is what's being captured in the GDP differences.
They have these microscopic refrigerators. And all my friends, especially my progressive friends, say "isn't that cute -- we could learn a lot from them on how to live simply."
But my European friends were rich. And they had American-sized refrigerators. So my takeaway was that you had to be a millionaire in the UK or Ireland to live like a US plumber. Same for those adorable dinky-ass cars. Millionaires drive Mercedeses and Range Rovers.
January 11, 2010
Hey! You're Misusing My Rule!
Procrastination pays in blogging. I wanted to post on John Taylor's guest editorial in the WSJ today. Taylor is the author of the "Taylor Rule" and he takes Chairman Bernanke to task for quoting it but not using is correctly.
Blog friend Josh Hendrickson at The Everyday Economist has beaten me to the punch:
The entire piece is a must-read, but I would like to focus attention on Bernanke’s use of the Taylor rule. What is troubling about the recent debate and framing it in terms of the Taylor rule is that it seems that everyone has their own definition. Over time, many economists have statistically fit the parameters of the Taylor rule in order to estimate the Fed’s reaction function. However, we have to be careful about what these estimates actually mean. These types of estimates are certainly useful for policy comparisons and other positive analyses. However, they are not useful for drawing normative conclusions because the fitted parameters incorporate policy mistakes in the estimation period.
Economist Smackdown!
Nobel laureate Paul Krugman says:
As health care reform nears the finish line, there is much wailing and rending of garments among conservatives. And I’m not just talking about the tea partiers. Even calmer conservatives have been issuing dire warnings that Obamacare will turn America into a European-style social democracy. And everyone knows that Europe has lost all its economic dynamism.Strange to say, however, what everyone knows isn’t true.
Harvard Professor N. Gregory Mankiw says:
Here is GDP per capita, adjusted for differences in price levels (PPP), from the IMF, for the United States and the most populous countries in Western Europe:
United States 47,440 United Kingdom 36,358 Germany 35,539
France 34,205 Italy 30,631
Spain 30,589
Readers of today's column by Paul Krugman might find these figures useful to keep in mind.
Ow! That's gotta hurt!
Yeah, those numbers impress me. So what could Americans do with that extra $11,000 of GDP per capita (if the government didn't tax it all away?) Maybe they could buy their own health insurance. And if insurers could compete across state lines and doctors could practice without fear of insanely frivolous lawsuits, maybe buy a new bedroom set, a new wardrobe or finance a new car with what's left AFTER paying for your own health insurance.
Or, we could just let the government spend that money and much, much more on the health insurance THEY think we should have.
(P.S. I'm not preaching to the choir any more - Silence is back!) :)
Posted by: johngalt at January 11, 2010 3:03 PMYeah, but I am at least in the pews on this one. I am all for allowing national health insurers. When you think about how many companies have offices and workers in many states it just doesn't make sense any more. Ditto for reform of malpractice rules.
I will add however that I do not see doctors as pure white hats in all this either. The AMA has staunchly fought any attempt to inject scientific testing into medical procedures. Your doctor is just right, no sense anyone attempting to prove the efficacy of his treatment. Here is where I think the health insurers could lead, it would actually be in their financial interest to fund studies to determine the most effective treatments.
Posted by: Silence Dogood at January 13, 2010 10:59 PMJanuary 1, 2010
"Where are the thinking people?"
Did anyone else watch JK's Merry Christmas video with Larry Kudlow interviewing Don Luskin and CNBC business correspondent Jerry Bowyer on the significance of Ayn Rand's resurgence in the Obamanomics era? It really is quite revealing. [Better quality audio and video here.] You see, Bowyer is a Chief Economist and a Christian though not necessarily in that order. He says that Ayn Rand's philosophy actually "handicaps our message. The American people will not be persuaded by that case for capitalism."
Later he said, "The Randians have never been able to really make the sale because Americans have an inherent sense that selfishness is not a good thing. So the Rand case that says selfishness really is good and embrace capitalism because it's selfish probably hurts us more than it helps us." This statement, however, and Jerry's meaning of "selfish" must be put into context by Bowyer's later assertion that "freedom is not a selfish thing."
Probably worse that the true-believer Bowyer is Kudlow. After saying that he "totally regards himself as a free-market capitalist" he conducts the entire interview from a sort of "Rand was half-right" point of view.
"Can one agree to like Rand on her free-market capitalism and at the same time put away, put aside her atheism? I personally have a lot of problems with that part. I don't see how you run a country, I don't see how you run a society, I don't see how you run your life, and I draw on my own life, without some spiritual, moral and religious rules of the road. I think that's what God teaches us. I think that's what the New and the Old Testament teaches us and that's why I think charity and helping others is so important. (...) On the other hand Jerry I hope that I am open enough to realize her ideas on free-market capitalism, we need a bigger dose of that right now in American history."
[The sound you hear is me pulling my hair out.]
I think I need to send my Rand on Capitalism vs. Altruism post to Kudlow. Check your premises Larry!
Noted Objectivist philosopher Dr. Harry Binswanger saw the program and forwarded it to his subscription email list with a long analysis (reprinted in whole below the fold).
What I want to know is where are the thinking people? Thinking in regard to being pro-reason and pro-independence. That is, why isn't a frequent reaction: "She's an atheist--that's good; she was for radical selfishness? How interesting! I've never heard of anyone taking that position. Maybe Nietzsche (but maybe not). Let me hear more."
Harry feels my pain. Heinlein, help us!
"The hardest part about gaining any new idea is sweeping out the false idea occupying that niche. As long as that niche is occupied, evidence and proof and logical demonstration get nowhere. But once the niche is emptied of the wrong idea that has been filling it — once you can honestly say, "I don't know", then it becomes possible to get at the truth." -The Cat Who Walks Through Walls, 1985
Subject: HBL You want bitter? I'll give you bitter.
December 24, 2009
From Harry Binswanger
You've got to watch this CNBC show on Ayn Rand. It's about 10 minutes out of
the Larry Kudlow show. Kudlow and a creep named Jerry Bowyer are critical of
Ayn Rand for her atheism and selfishness. Her defender is Donald Luskin, a
name that's vaguely familiar, but whom I don't know. Luskin does try to make
some points, but he is not deep and he is not given enough time.
http://www.cnbc.com/id/15840232?play=1&video=1367652591
But here comes the bitter part. In the mounting publicity about Ayn Rand,
I've seen commentator after commentator make these same
criticisms: she's an atheist and she's for selfish greed. What the hell is
wrong with these people? Those are not criticisms: those are her virtues.
What I want to know is where are the thinking people? Thinking in regard to
being pro-reason and pro-independence. That is, why isn't a frequent
reaction: "She's an atheist--that's good; she was for radical selfishness?
How interesting! I've never heard of anyone taking that position. Maybe
Nietzsche (but maybe not). Let me hear more."
A thinking person would then pursue some further thoughts along the lines of
"What reasons have ever been offered for unselfishness? I know Ancient Greek
culture was not inclined toward that 'meek shall inherit the earth' stuff.
Were the Ancient Greeks pro-altruism, or did that begin with Christianity?
Is the drivel I always hear about unselfishness something that's just a
leftover of Christian nonsense?"
I can only go by what *my* reaction was when I first encountered Ayn Rand's
atheism and pro-selfishness. When I came to her talk on the Objectivist
ethics my Freshman year at MIT (Spring, 1962), I had slid back from an
earlier atheism into speculating as to if maybe there was a (non-conscious)
"something"--like a basic law of the universe (e.g., that all processes move
toward equilibrium) that was God in an impersonal sense. When I say I was
"speculating," I mean I was indulging in absurd, arbitrary, "what if's?"
At any rate, in the Q&A following her lecture, she was asked whether she was
an atheist, and she answered, in a tone of some surprise at even being
asked, "Of course." It was as if she had been asked whether she wore a coat
when she went out in cold weather. I heard an answering "Of course" in my
own mind, and that was that. To be sure, she went on to explain that she
accepted only reason and that there had never been any reason given to
believe in God. That solidified my "Of course," but all that had been really
necessary was what she did by her tone: to indicate that this was not an
occasion for fantasy but a question of fact--like whether or not there
gravity holds the moon in orbit. Once the issue had been put into that
rational, factual, scientific context, there was nothing to consider. "Of
course."
Now my reaction to her selfishness. Within days of her speech, I bought a
copy of Atlas Shrugged and began reading. I think it was this passage, from
page 51, that caused the mental light bulb to turn
on:
> "You're unbearably conceited," was one of the two
> sentences she heard throughout her childhood, even
> though she never spoke of her own ability. The
> other sentence was: "You're selfish." She asked
> what was meant, but never received an answer. She
> looked at the adults, wondering how they could
> imagine that she would feel guilt from an undefined accusation.
That had been exactly my reaction to my mother's nagging along the same
lines. It was either then or a few pages further on that I thought to
myself, "I had never bought into the idea that I should feel guilty for
being selfish, but this lady goes me one better: she thinks it's actually a
virtue to be selfish!" My reaction was one of admiration. Mixed with a vague
chagrin that I hadn't taken that step myself.
My purpose is not to brag. Alright, maybe a little--but only in retrospect.
At the time, I didn't think there was anything special about me in this
regard: it was just a matter of common sense and personal honesty. I thought
that half to a third of the population was in the same situation as I was.
Yes, there were the self-deceivers and the sheep, but there were also, I
thought, a goodly number of people just waiting to be told that
unselfishness makes no more sense than religion.
So where are those people? You can say they have been destroyed by the
comprachicos of our educational system--except that the comprachicos weren't
that numerous until the 70s, and there are amazingly few people among the
older population who are open to atheism and selfishness. Lawrence Kudlow
looks to be just a little younger than I am, and yet there he is taking his
belief in nomadic tribal tales as if it were the solid finding of science.
Is it that it's too hard to go back on a lifetime of accepting and acting on
altruism? Well, there were about a million copies of Atlas and hundreds of
thousands of copies of The Virtue of Selfishness sold to people who were
young in the pre-comprachio era.
My bitterness (probably temporary) is fueled by seeing *everyone* now raving
about Atlas Shrugged while missing the whole point of the novel, treating it
as if it were essentially a condemnation of over-regulation. I'm reading
dozens and dozens of articles on the web, pro and con, on the rising
interest in Ayn Rand. They are all depressing.
And what about the philosophic content of her non-fiction? What about the
incredible outpouring of knowledge, from the nature of existence to the
theory of concepts, to the theory of free will, and on and on? Sure, I can
understand why professional philosophers have tremendous difficulty in
grasping any of it, because of their automatized methodology (though that
took me decades to appreciate). But where are the thinking readers among the
non- philosophers?
Where are the people who are *at least intrigued* by ideas like:
"Psycho-epistemology is the study of man's cognitive processes from the
aspect of the interaction between the conscious mind and the automatic
functions of the subconscious"? Or, "Art is a selective re-creation of
reality according to an artist's metaphysical value- judgments"? Or,
"Emotions are the automatic results of man's value judgments integrated by
his subconscious; emotions are estimates of that which furthers man's values
or threatens them, that which is
*for* him or *against* him"? Or, "Sacrifice is the surrender of a greater
value for the sake of a lesser one or of a nonvalue"? Where are the people
who, even if they have questions or doubts, can recognize the power of such
ideas?
I guess most of them are on HBL.
And here appears that local social conservative, starting the year by thanking the ThreeSourcers for having befriended him!
I, too, pull my hair out. I do my best to avoid theological tangents on this blog, but I'm going to shoot my mouth off for a moment and posit that for the thinking theist, Randian Objectivism and genuine Christianity not only are not opposed to each other, but actually complement each other nicely in life as partners, because Objectivism centers around recognition of the free individual as he was created to be.
And the place where I tear my hair out is that intersection of popular-culture Christianity and political conservatism, horribly misnamed "compassionate conservatism," where people see big-spending government programs as some sort of outworking of the kingdom of God. We could go on for pages and weeks talking causes and solutions.
I'll withhold my dissertation on the political distinctions between the Old Testament prophet in Israel and the New Testament evangelist in the Roman Empire - and simply leave it by saying that Bowyer's attempt at compartmentalizing his faith and his political philosophy in separate boxes is a mistake, and a tragic one.
Posted by: Keith at January 2, 2010 12:47 PMThreeSources being a case in point. What I consider devout Christians are a distinct majority around here. I guess the louder voices convey a different impression.
I feel enough in the minority seeking limited government and enumerated powers. If I chase off my friends who believe it gets a bit more lonely.
Posted by: jk at January 3, 2010 11:48 AM
That show was painful; a textbook example of how TV in its quest for eyeballs can destroy a good topic. I liked Luskin up to the point where he began shouting at Bowyer (which might've been warranted, I stopped listening to him rather early).
I'm done pulling my hair out over any of this: the constant need to preach about limited gov't and personal responsibility (where Objectivism and Christianity are best met), means I've got to keep my head, stay focused and at least appear to be the happy warrior.
Rand was a polemic and did a disservice to her ideas with her lack of personal ideals. The biggest flaw with the 'conventional wisdom' that goes along with Rand is that selfish = greedy.
Look at her characters (and her life) just for a second, please. Selfish: yes. Greedy: absolutely not.
Posted by: Brian Gregory at January 3, 2010 6:13 PMThere are short term and long term goals. I have no delusions about discrediting altruism before the next election cycle but I do see it as the next step forward in human societal development. "Progress" if you will.
I'm as friendly with the social conservatives I meet as with any other conservative but when they say something I disagree with I'll speak my mind. If one says the state should abrogate my liberties because he finds some things I might do "immoral" I'll explain why he's wrong. If he laments that "we need a bigger dose of free-market capitalism but charity and helping others is just as important" I'll suggest he read Rand's explanation why capitalism and altruism are mutually exclusive ideas. And if he doesn't believe her I'll ask him to just look at the state of our government today.
Unfortunately the Believers have been convinced beyond question that altruism is a moral ideal. When I question their altruism they consider me hostile to their faith. If I don't question altruism then my children will have even less freedom than I do. Think badly of me if you'd like. I choose to fight for my kids future right to a life of happiness.
Posted by: johngalt at January 3, 2010 8:23 PMWe'd never think badly of you jg! I just worry about the short term goals.
And bg (you've commented a few times, you're initials...) is spot on about the tone of the piece and the cause. The old Kudlow & Cramer show sat astride "Firing Line" for serious and respectful exploration of disagreements. Now CNBC loves to show the boxing gloves (if you stayed up late, could you think of something more stupid?) and have clearly moved to book pugnacious guests.
That's Capitalism for ya' -- all about the might $$$!
Kind words appreciated but I still wonder sometimes.
Describing my reply to dagny on the way to play hockey last night I expanded on the theme of what happens if I don't challenge altruism: "Our heirs and successors will be subjected to an endless series of collectivist tyrants, from either party, taxing them right to the limit of popular revolt."
So I'll continue to be a "louder voice" around here extolling the virtues of selfishness. Perhaps I'll one day discover a way to do it that evokes visions of bunnies and the smell of freshly baked cookies.
Posted by: johngalt at January 4, 2010 2:54 PMDecember 17, 2009
Evolution to Extinction
Sanctimonious progressives ridicule social conservatives for refusing to acknowledge the validity of the theory of evolution. Too bad they are too dense to see the obvious parallel with their refusal to acknowledge the lessons of history. But IBD's Michael Ramirez sees it.
I thought they all died in the Ice Age. These dinosaurs oughta stay away from the Gore Effect:
http://directorblue.blogspot.com/2009/03/gore-effect-strikes-again-giant-dc.html
December 16, 2009
QOTD Runner-up
This, from a WSJ house editorial titled, "The Audacity of Debt":
"Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren," Senator Barack Obama said during the 2006 debt-ceiling debate. "America has a debt problem and a failure of leadership. Americans deserve better." That was $2 trillion ago, when someone else was President.
Professional Courtesy
Close enough to Christmas to start pumping out the treacley, feel-good human interest stories at ThreeSources.
Seriously, Professor Mankiw's "Memories of Paul" [Samuelson] is a sweet story,
November 18, 2009
Cloward-Piven
While trying to maintain a low profile on a plane yesterday, The Refugee caught the Glenn Beck show on Fox News. Beck showed a clip of Damon Vickers from Nine Points Management and Research on CNBC (I think) saying that the current direction of US debt would lead to a currency crisis that would result in a whole reworking of worldwide currency and a new world order. The Refugee does not do the analysis justice, but it was cogent and chilling.
Beck then interviewed Vickers and discussed Cloward-Piven. Columbia professors Cloward and Piven were two 1960's radicals intent on socializing America. On September 28, 2009, The American Thinker ran a piece on the Cloward-Piven strategy. Here is an excerpt:
The Strategy was first elucidated in the May 2, 1966 issue of The Nation magazine by a pair of radical socialist Columbia University professors, Richard Andrew Cloward and Frances Fox Piven. David Horowitz summarizes it as:
The strategy of forcing political change through orchestrated crisis. The "Cloward-Piven Strategy" seeks to hasten the fall of capitalism by overloading the government bureaucracy with a flood of impossible demands, thus pushing society into crisis and economic collapse.
Cloward and Piven were inspired by radical organizer [and Hillary Clinton mentor] Saul Alinsky:
"Make the enemy live up to their (sic) own book of rules," Alinsky wrote in his 1989 book Rules for Radicals. When pressed to honor every word of every law and statute, every Judeo-Christian moral tenet, and every implicit promise of the liberal social contract, human agencies inevitably fall short. The system's failure to "live up" to its rule book can then be used to discredit it altogether, and to replace the capitalist "rule book" with a socialist one. (Courtesy Discover the Networks.org)
Hopefully, The Refugee is not just falling into a conspiracy theory trap. However, it all adds up very nicely. Worth the read and worth the thought. Scary.
As Rahm Emmanuel famously said, "Never let a crisis go to waste." Obama is a huge Alinsky follower, too. Sign me up for the conspiracy society.
Posted by: Lisa M at November 18, 2009 7:15 PMPretty much the plotline of Hayek's "Road to Serfdom"
Posted by: jk at November 18, 2009 7:22 PMThe thing that scares me the most is that it could work.
Posted by: Boulder Refugee at November 19, 2009 11:02 AMBR: it doesn't have to, all is lost already.
Maybe the Gibson guitar raid is too close to home (shh, don't tell AG Holder, but I've got a few of those...) but I read this as we have no liberty left to defend. Read the update link in my Turn out the lights post. This ain't the road to serfdom, we've arrived.
Posted by: jk at November 19, 2009 12:24 PMNovember 12, 2009
Marginal Tax Rates
If the words put your friends to sleep, Professor Mankiw brings a picture:
And every time you do something nice for the poor, you make this worse. Then-Governor Bush campaigned in 2000 on "toll-booths to the middle class." We all have a gripe or two with President Fortythree, but he got it. President Obama obviously does not and I question how many GOP pols do.
This little picture says all the economics and it implies the morality of making people work through "The Dead Zone" for no gains.
Only government can make it so goddamn pathetic that you earn a little more but wind up with less net income, that earning $40K a year is only marginally better than mooching completely off taxpayers.
Posted by: Perry Eidelbus at November 12, 2009 3:27 PMOoh. Mister Presnit! Mister Presnit! I've found some waste and fraud for you to cut!
Posted by: johngalt at November 12, 2009 5:37 PMMerle Hazzard
Hat-tip: Prof Mankiw
November 3, 2009
Boom and Bust?
In last Thursday's Quote of the Day Veronique de Rugy described how America is more and more resembling an Ayn Rand novel. (I think we all know which novel she refers to.) She correctly identified "crony capitalism" as the culprit and government manipulation as an essential ingredient for said cronyism but I took her to task for her examples: Bailouts. Not to defend government bailouts but the best example of crony capitalism I can think of at the moment is how the mortgage crisis was 100 percent engineered by government regulation.
Brother Silence agreed in the comments, saying that government made sure the banks made loans that were not discriminatory against the poor (because we all know it's not their poorness that keeps them from repaying their debt?) But I was befuddled when our good brother lept from this obviously flawed economic transaction - flawed from the standpoint of a private lender ever receiving his principal back, with or without interest - to blame the mortgage meltdown on "the boom and bust effect." There is no denying the fact that financial professionals did their level best to profit from the preordained train wreck set in motion by our friends on the Senate Banking Committee, among others, but is it not also obvious to everyone that without said foolish lending "thou shalts" the opportunity wouldn't have existed in the first place?
The only way for government to fix the economy is to stop "fixing" the economy. Or am I mistaken?
UPDATE: I also meant to include excerpts from this Robert Skidelsky article I found on boom/bust cycles:
It is impossible to imagine a continuous gale of creative destruction taking place except in a context of boom and bust. Indeed, early theorists of business cycles understood this.(...)
These are efficient responses to changes in real wages. No intervention by government is needed. Bailing out inefficient automobile companies such as General Motors only slows down the rate of progress. In fact, whereas most schools of economic thought maintain that one of government's key responsibilities is to smooth the cycle, "real" business-cycle theory argues that reducing volatility reduces welfare!
It is hard to see how this type of theory either explains today's economic turbulence, or offers sound instruction about how to deal with it. First, in contrast to the dot-com boom, it is difficult to identify the technological "shock" that set off the boom. Of course, the upswing was marked by super-abundant credit. But this was not used to finance new inventions: it was the invention. It was called securitised mortgages. It left no monuments to human invention, only piles of financial ruin.
There are those pesky bailouts again! But Skidelsky's point is that it's hard to have a boom-bust cycle in something where there is no production to boom and then bust.
I do remember the comment. I considered it a duty of the blog to reply with a link to Austrian Business Cycle Thoery nad you have caught me in my failure.
Here's a nice, short and accessible overview from the Mises Institute.
Posted by: jk at November 3, 2009 3:44 PMRemember, "financial professionals" does not necessarily mean, and today typically does not mean, "free-market capitalists."
I had been working off and on on quite a lengthy comment to what you guys had left there, but I found my work PC rebooted one morning and lost the Notepad session I was using to write the comment offline. I'll do it this week sometime.
Posted by: Perry Eidelbus at November 3, 2009 4:16 PMNo boom and bust? I bet there are a whole bunch of home builders who would disagree. Doesn't Austrian theory basically state that boom and bust comes when more capital is invested in an area of the economy than it can support long term? Demand to get in causes prices to rise above a point that can be sustained, and when the price drops back to that level a bust has occurred. Did the dot-com boom really leave monuments to human invention? Pets.com? More people planning on advertising on the web than selling products?
My overall but possibly not well stated point was that the base role of Federal monetary policy, at least since the late 1800's, is to attempt to smooth the boom and bust cycle that really is part of capitalism. The question is how much you can do this without destroying the power of capitalism.
Posted by: Silence Dogood at November 8, 2009 11:59 AMOctober 30, 2009
Too Big to Fail
ThreeSources blog friend the Everyday Economist has a great compendium post up. [Spoiler alert: EE is ag'in it!]
Ultimately, the debate about the limits of the Fed’s abilities as lender of last resort and the doctrine of “too big to fail” boil down to the same principles that arose in the rules versus discretion debate for monetary policy. Discretion generates uncertainty in that the behavior of the actor cannot be predicted. As John Taylor has documented so well in his recent research, the erratic and inconsistent behavior of the Federal Reserve and the Treasury during the financial crisis can explain why the crisis (and corresponding economic performance) got so much worse in the months of September and October of last year.Moving forward, policy needs to be guided not by the discretion of the central bank or the Treasury secretary, but rather by the rule of law. Orderly and predictable bankruptcy procedures for all firms and the elimination of the doctrine of “too big to fail” would go a long way toward making potential future financial crises less severe (and might prevent others altogether).
Firstly, "Hear, hear!"
Secondly, if "too big to fail" is an established doctrine shouldn't it be capitalized?
Finally, because something is Too Big to Fail doesn't mean that it won't, or can't, do exactly that. Take President Obama for example. His presidency is "too big to fail" but he continues to do so on a regular basis.
Posted by: johngalt at October 31, 2009 3:57 PMOctober 27, 2009
Huh? Incentives Matter?
Instapundit continues his "going Galt" chronicles with some sobering statistics of NYC revenue.
The average Manhattan taxpayer who left the state earned $93,264 a year. The average newcomer to Manhattan earned only $72,726.That's a difference of $20,538, the highest for any county in the state. Staten Island was second, with a $20,066 difference.
It all adds up to staggering loss in taxable income. During 2006-2007, the "migration flow" out of New York to other states amounted to a loss of $4.3 billion.
If these guys won't see liberty and principles, they should at least consider the Laffer Curve.
It's tempered a bit by the probability that some of those New Yorkers retired and moved to Florida, so I'd be curious to see how many left the state and kept working in their new state. But overall, I can personally assure you that it's too true.
Westchester is ridiculous with all the tax increases, but there's no way in hell I'd live in any of the boroughs. Were it not for a couple of things, we'd have moved to Connecticut by now, maybe Nassau County (except the LIRR sucketh rocks). As if either were significantly better, though? It's a matter of going to where the water isn't boiling...not yet.
And to hell with New Jersey, that cesspool.
Posted by: Perry Eidelbus at October 27, 2009 12:23 PMOld country song had it: "'T' for Texas, 'T' for Tennessee."
At least New York was always bad (well, since John Jay died...) Here in Colorado we have to watch a low-tax, high freedom state being dismantled in front of our eyes.
Posted by: jk at October 27, 2009 1:00 PMChin up JK, Colorado still rocks, and the property taxes have the east coast beat by a mile. We can sink quite a ways and still not be in their league. There is a beautiful snow falling tonight and the girls are warm in their beds hoping madly for a snow day tomorrow. Perry, you don't know what you are missing. I did my time in Jersey, 6 months was enough even if Westfield was an OK town. My wife worked on Wall Street (for AIG even, just to get the dirty laundry fully out) and hated the train and subway ride to the World Trade Center (RIP).
Posted by: Silence Dogood at October 28, 2009 12:11 AMI don't give Governor Ritter and the all-Democratic bicameral legislature credit for the climate, which is so perfect, I will never leave. (Yes, in spite of the green jobs initiative, I still consider that supra-government!)
On the dark side, Silence, we don't have the money to pay prison guards but we're building light rail. But hay, maybe your wife can learn to hate the public transportation here in a couple of years.
I lived in Utah for 14 years, so I know how nice and inexpensive the Intermountain West can be. But my job is here, and I like where I live, so thus far it's worth it to put up with the politics.
It was also worth it for American colonists to put up with British policies until 1775. They did more than shrug.
Posted by: Perry Eidelbus at October 28, 2009 2:50 PMOctober 23, 2009
Marginal Tax Rates
I say "Marginal Tax Rates" and even the ThreeSources choir gets heavy eyelids (I always say that by the time you get to EBITA, you can put any audience to sleep).
But here's a great story in Forbes that puts a 70% marginal tax rate into perspective. It enumerates the perverse incentives -- and puts human faces on them. Three workers are shown who would be better off working less or not at all.
There are now more than two dozen federal tax breaks, including seven created or expanded by February's $787 billion stimulus, that disappear (often simultaneously) as income rises. As her adjusted gross income climbs from $60,000 to $90,000, a single parent could lose some or all of the $1,000 per child credit, the $2,500 per college student credit, the $400 Making Work Pay credit and the $8,000 first-time home buyer credit, as well as deductions for contributions to an individual retirement account and for interest paid on a student loan. Such gotchas can push up the marginal federal income tax rate--that is, the tax on the next $1 earned--far beyond the top 35% rate imposed on rich folks. For a mom with a $30,000 income, the phaseout of the earned income credit and loss of a federal Pell college grant can produce a 40%-plus marginal rate, without counting Social Security and Medicare taxes.
This is a good column to mail. I don't know that it has any new news for the choir, but it does a superb job showing the tradeoffs from what seem like good programs.
Hat-tip: Instapundit, who sees it as "Going Galt."
Have our friends in Mayo-ville seen this?
Posted by: johngalt at October 27, 2009 1:20 AMOctober 21, 2009
Matt Drudge Takes Down the Dollar
A story at the Politico essentially argues that Drudge is playing politics with the decline of the U.S. dollar:
On Tuesday, Matt Drudge ran a headline about the weakening U.S. dollar on his website, Drudgereport.com. In and of itself, that would be unremarkable, except that it was the 18th time Drudge had posted a link to a story about the weak dollar this month.And October was only 20 days old.
Clearly, Matt Drudge has developed a fascination with the declining U.S. dollar.
“He’s fixated on it,” said Tom Rosenstiel, director of the Pew Research Center’s Project for Excellence in Journalism. “There’s no question that Drudge can alter what people are paying attention to.”
[...]
Drudge also has tried to tie President Barack Obama to the dollar’s plunge. “Obama Dollar Retreats Most Against Commodities in Wealth Shift,” noted Drudge’s link to a Bloomberg story Oct. 13. “Obama Under Fire Over Dollar,” he headlined Oct. 7, linking to a story in the Financial Times.
Nevermind the fact that he is linking to stories from other sources with this theme. Of course, such discussion is common regarding the dollar and the president. The BBC reported in 2004:
But the pace of the dollar's decline has picked up since President George W Bush - whose heavy spending has pushed the US finances into the red - was elected to a second term in office last week.
Are we to believe that the spending policies of the current administration will somehow have different effects on the value of the dollar?
The best part of the Politico is this excerpt:
What’s more, there’s one economic upside to a soft dollar: increased exports for U.S. manufacturers. Reporter Nelson Schwartz noted in an article in The New York Times on Sunday: “A weak dollar could prove beneficial to the American economy by aiding long-suffering manufacturers, rebuilding a stronger industrial base and lifting exports even if it makes life harder for trading partners around the world, especially in Europe.”But that Times article, titled “In Dollar’s Fall, Upside for U.S. Exports,” did not receive a link from Drudge.
Of course, the degree of this effect is dependent on elasticities. Even beyond that, however, defending the declining purchasing power around the world as a positive sign because it boosts exports is like arguing that the upside to unemployment is that we all get to experience more leisure.
I hope Mr. Javers never tunes in to CNBC when Kudlow is on!
I'll quibble a bit with your closing analogy, hb. A large sector of the economy gets most of its revenue from exports, and those industries have a legitimate and rational reason to cheer a weaker dollar.
Don't report me to Larry -- I'm still a strong dollar guy!
Better not read Jimmy P either: Paul Volcker: Obama’s forgotten man
Posted by: jk at October 21, 2009 1:43 PMSeems to me the Administration is doing enough damage without Matt Drudge's help. ThreeSourcers, of course, will not be surprised to read this; in fact, there's a bittersweet tinge to being able to say "we told you so - in advance" to this:
http://www.republicans.waysandmeans.house.gov/News/DocumentSingle.aspx?DocumentID=150826
Posted by: Keith at October 21, 2009 3:54 PMKeith, don't you know, Drudge must be the most dangerous man in the world. No matter how much the Fed is trying to save the dollar, Drudge's mere words are enough to convince the world to dump it!
JK, not everyone exports or is within a degree or two of separation from exports. However, most Americans are within a degree or two of imports. Now, no one can know the true value of the dollar. Only an entire free market, with all its uncountable transactions, can reveal it. Let's call that point X. If the dollar is weaker than X, it's a form of protectionism because it benefits the minority of the economy that exports.
Deliberately weakening the dollar is a favorite tool of people unnecessarily worried about the U.S. trade deficit. (Warren Buffett is one such idiot who thinks we shouldn't import more than we export.) These people either don't know or refuse to admit the havoc that would ensue.
All this is besides the fact that the Fed is inflating the money supply to monetize the huge increase in budget deficits. I've been saying it for damn near a year now: there just isn't enough money in the world to finance it. Even if foreigners did have the willingness, they're already tapped out.
Posted by: Perry Eidelbus at October 21, 2009 8:58 PMOctober 19, 2009
The Ultimate Public Option
I had a blog post brewing in my head when I woke up this morning. Curiously, Blogging God James Taranto has thieved it:
British health care, it seems, resembles American elementary and secondary education, in that the government has a monopoly but there is an expensive private opt-out--and many of those who run the monopoly avail themselves of the private system. If you like the public schools, you'll love ObamaCare!
Taranto is following up on a story that British Heath Care workers will be given taxpayer-financed private care. Else, socialized medicine will kill all the providers. Beautiful, isn't it?
But I had two thoughts on education (all my family members are teachers, I'm a dead man if one of them ever stumbles on ThreeSources). The first is the title: public education is the ultimate public option. No, there's no law to keep us from opening up the ThreeSources Academy of Reason and Civics and Advanced PE, but all of our students will have to pay for both public education and our inflated tuition. The government will regulate how many days are taught and have great influence on our curricula. Lastly, if we do well and attract attention, we can be denied building permits, accreditation, fire code clearances, &c.
We can swim but they completely own the pool. A serious person cannot help but see that health care would be just like that. Crappy substandard care for all, and an escape of quality and innovation that only the rich could afford. Progressive, indeed!
The other point is that innovation in a sector is frozen to the time government takes over. The highly subsidized and regulated passenger railways are frozen at WWII technology, British Health Care in 1975 all the time. And American education has not progressed an inch since Wilson was President (most would say it has fallen). In spite of communications, Internet, advances in access to books and information, and ubiquitous, inexpensive computers, schools have seen no improvement.
Medicine has made startling gains, but it might be 2009 forever. Shame
It is no surprise that British medical providers - the creators - must be appeased else even these socially-minded Europeans would strike from the system they know to be a travesty on the public. My exhortation to them is, "Revolt brothers!"
The "reformers" even admit that medical innovation would cease under their guidance. Just listen to Reich: "But that means less innovation, and that means less new products and less new drugs on the market, which means you are probably not going to live that much longer than your parents. Thank you." [1:50]
Dear cousin writes today that she'd like to see everyone work together and "try to find a compromise on health care." Sigh. Where does one begin? The general public, as cousin writes, is "honestly just not that interested." They simply want an end to the dispute.
Posted by: johngalt at October 19, 2009 5:30 PMOctober 13, 2009
Mea Maxima Culpa!
Ooops.
I suggested that my initial reaction and remarks about Nobel Economics Prize winners President Barack Obama Elinor Ostrom and Oliver Williamson might have to be "revised and extended."
Reading yet another positive review today, this time from David Henderson of the Hoover Institution, I am going to stop digging and offer a full and fulsome retraction.
I, jk, misread the existence of structured, non-coercive association that is respectful of property rights as collectivism. I criticized without complete knowledge and my criticism was off base. I humbly recant and apologize to the Nobel committee and any ThreeSourcers who were inconvenienced.
I feel better.
October 12, 2009
Feeling Better about the Peace Prize
After reading more about the Nobel Economics Prize -- which I do take seriously -- maybe the Hope and Change Prize was not poorly decided.
I reserve the right to revise and extend these remarks as I learn a little more. But the Michael Spense overview that Professor Mankiw links to puts me ill at ease. "The common theme underlying the prize this year is that markets do not solve all problems of resource allocation and incentives well or even at all."
The deeper insight that these scholars have helped us to come to understand is that there are many circumstances in which non-cooperative outcomes (nash equilibria) are deficient or sub-optimal, and that a good part of economic and social progress lies in the creative design of institutions whose purpose is to cause these non-cooperative equilibria to come closer to socially and economically efficient and fair results.Climate change is a commons problem on a global scale with the added complication that collective action is designed not directly to produce results (in the sense of temperature reduction), but rather to acquire tail insurance by shifting the probability distributions against outcomes that are highly destructive but not certain to occur. Though some are not convinced this is a problem worth acting on, a majority globally recognize that there are risks to be taken seriously. This may be the most complex commons problem we have yet faced. We are in the midst of shifting values with respect to energy efficiency and clean technology. The challenge is to design institutions, mechanisms and incentives that move us in the right direction.
I stand ready to be disabused of my opposition. No doubt laureates Elinor Ostrom and Oliver Williamson know a couple of things that I do not. But the claim that "people and societies find ways through organizational structures and arrangements, political and other institutions, values, incentives and recognition, and the careful management of information, to solve these problems" leaves me cold.
UPDATE: Arnold Kling is more positive. CLearly I need to delve a little deeper.
UPDATE II: A roundup of positive reviews from FEE.org:
The bloggers emphasize that both economists have devoted their attention to voluntary forms of governance, Ostrom in commons (among other things) and Williamson in firms. Regarding Ostrom, Tabarrok notes, “[H]er work has explored how between the atomized individual and the heavy-hand of government there is a range of voluntary, collective associations that over time can evolve efficient and equitable rules for the use of common resources…. For Ostrom it’s not the tragedy of the commons but the opportunity of the commons.”
There's that word again... "progressive."
The best response to this latest load of unapologetic manure from the Nobel Committee is to reprise Lisa M's excellent C.S. Lewis quote. (last comment)
"We all want progress, but if you're on the wrong road, progress means doing an about-turn and walking back to the right road; in that case, the man who turns back soonest is the most progressive."
Damn, if we could only get this precise meaning onto a bumper sticker.
Posted by: johngalt at October 12, 2009 2:01 PMjg: yes we can! No only can we get that sentiment on a bumper sticker, we can put it in a form that The Won's adoring throngs will appreciate:
Hope and Change -
ur doing it rong
It is so funny to read the differing perspectives on the prize. Those on the left routinely point out that this is a prize rewarding behavioral economics or that markets don't always work. Meanwhile those who are more libertarian emphasize that this shows how private institutions emerge to alleviate problems that markets do not.
Posted by: EE at October 13, 2009 12:52 PMOctober 5, 2009
Medicare and Freedom
I used to worry that other ABC News staffers would poison poor John Stossel's cocoa. He is safely ensconced in the vast-right-wing protectorate of FOXNews now.
So my concern turns to Professor Mankiw. Read his home run of a blog post on Medicare and Freedom:
Today, over at the NY Times, Paul Krugman writes:
the modern G.O.P. considers itself the party of Ronald Reagan -- and Reagan was a fierce opponent of Medicare's creation, warning that it would destroy American freedom. (Honest.)Pretty silly of old Ronald, wasn't it?
Awesome on stilts with platform soles. But how long will the leading lights of Hahvaad let him live?
I am still being compelled, under the threat of fines and imprisonment (not to mention that my employer would be entirely shut down for "conspiracy") to pay Medicare premiums now. The hope is that when I retire, at minimum over three decades from now, I'll get at least a few cents on the dollar for what I've put in.
Silly me for not wanting to participate in a Ponzi scheme that makes musical chairs look equitable. Silly me for thinking that "freedom" means keeping what I earn and spending it on what I think is best for me.
Posted by: Perry Eidelbus at October 5, 2009 11:40 AMKrugman wouldn't know freedom if it bit him in the ass. (See, I can play on the Beck/O'Reilly field as well as Friedman/Buckley.)
Seriously, he cannot opine on freedom because he does not understand it. Today, Medicare takes freedom from you, me, Perry, and the three AMA doctors Mankiw links to. In the future it is positioned to take all economic freedom and property rights from everyone as it cannot be funded and is too popular to cut.
Silly old Ronald, indeed.
Speaking of Reagan and socialized medicine:
http://www.youtube.com/watch?v=BnLa1BvtaxM
Posted by: johngalt at October 5, 2009 1:41 PMSeptember 29, 2009
The State of Economics
Professor Mankiw embeds a video from the Stand Up Economist. I am a big fan, but he plays to academic prejudices a little in this one. Oh, well.
Better still is an ECON-SMACKDOWN between two of my favorites: Arnold Kling and Josh Hendrickson. I bow to both and would not presume to pick a winner, but the discussion is superb. All is expounded, linked and explained on Hendrickson's Everyday Economist blog:
Kling is never afraid to take a position outside of conventional thought and blog friend EE presents a substantive argument for the corpus of macro principles. Good stuff.
September 24, 2009
The Rich get Richer
And the poor get richer, too! Don't tell anybody, it ruins a great meme.
James Pethokoukis links to new research that shows Income inequality in America is overstated. Robert Gordon:
The rise in American inequality has been exaggerated both in magnitude and timing. Commentators lament the large gap between the growth rates of real median household income and of private sector productivity. This paper shows that a conceptually consistent measure of this growth gap over 1979 to 2007 is only one-tenth of the conventional measure
Alan Reynolds's superb "Income and Wealth" does a great job counteracting this as well
Exhibit B on the the same meme: it has been told to me (I've never really taken the time to check it out myself) that if you were to compile a list of the 500 richest people in any given nation, and compare that to the same list from a generation before, you'd see the same names on both lists - either the same person or a descendant. In most countries, the wealthy class stays fixed. No so in America, which has far more turnover on that list than other nations. Average people penetrate wealth and worldly success far more frequently here than elsewhere, be it England, India, or Thailand.
That would seem to be the result of individual economic freedoms and our being a more classless society (trust fund babies notwithstanding). Not only to the rich get richer and the poor get richer here, but each person's place in that hierarchy is far less fixed. Thoughts?
Posted by: Keith at September 24, 2009 12:08 PMUnderscores and exclamation marks, Keith! In a free society people move among the quintiles -- another reason the income inequality attacks are so specious.
Posted by: jk at September 24, 2009 1:10 PMSeptember 22, 2009
Perverse Incentives
Another great argument for free trade is the conversion of tax avoidance to productivity: the same argument that is (appropriately) made for simplifying the domestic tax code.
Professor Mankiw links to a WSJ article that defies credulity. How's this for "Broken Windows:"
BALTIMORE -- Several times a month, Transit Connect vans from a Ford Motor Co. factory in Turkey roll off a ship here shiny and new, rear side windows gleaming, back seats firmly bolted to the floor.Their first stop in America is a low-slung, brick warehouse where those same windows, never squeegeed at a gas station, and seats, never touched by human backsides, are promptly ripped out.
.The fabric is shredded, the steel parts are broken down, and everything is sent off along with the glass to be recycled.
Why all the fuss and feathers? Blame the "chicken tax."
The chicken tax -- the mohair subsidy's poultrified (-fried?) cousin -- is an LBJ-era trade spat that lives on. Western Europe taxed chicken from the US, so President Johnson taxed cargo vans. So now, the Turks make "passenger vans" with seats and windows that are removed and shredded. Presto, chango! Instant cargo van.
Any similarity you may feel between Chinese tires and chickens is all in your head. We wouldn't do anything that stupid -- this is the 21st Centaury!
September 16, 2009
Quote of the Day
I'll defend Economics from Paul Krugman, but Nassim Nicholas Taleb has, as this article states, earned the right to some I-told-you-sos:
My whole idea is to lower risk in society by developing a system that can resist human error, rather than one where human error rules. The first step is to make sure that no financial institution is too big to fail. Next, make sure governments don't favour big companies. Governments should also decrease the role of economists – they're no more reliable than astrologers, and they do more damage. -- Nassim Nicholas Taleb, "Suck It Up, America!"
Hat-tip: Jimmy P
All right, I finally read the interview. His powers of prediction are...overrated. He's correct about economists' and financiers' inability to predict the future, correct about debt, wrong about Iceland, incorrect about Canadian self-sufficiency, wrong about "developing a system," very wrong about the nature of human information, and utterly wrong about actively preventing "too big to fail."
"For the past decade, he's been warning that the global economy has become far more vulnerable to unpredictable events that can cause vast disruption."
That was no prediction, because such a "warning" is completely meaningless. What does it mean, exactly? He says economists as "no more reliable than astrologers," which is true, but his own "predictions" have all the precision of fortune cookies. When something happens to ripple through international financial markets, he pats himself on the back. That's a bunch of bull.
Of course the world economy, having grown so complex, is susceptible to "unforeseeable events that can cause vast disruption." Anyone can see that. But his prediction lacked any specifics
He was simply a stopped clock that was eventually right. Similarly, don't believe all this hype about Nouriel Roubini, who also didn't have these amazing powers of prognostication that the media would have you think. Mark Zandi of Moody's frequently provides soundbites, and too many in a way. career of predicting a recession every year since at least 1997, maybe before then. Of course these two would eventually be right if they keep predicting the same thing over and over.
As I said, he's correct that "Central bankers have no clue" and about economists' ability to predict the future. Anyone familiar with Hayek knows that, and why.
The Internet did not "bankrupt" Iceland, no more than it caused the tech bubble. The Internet was merely the conduit for information, not a cause. The British and Dutch governments were wondering as early as 2006 what would happen if Iceland's major banks couldn't cover British and Dutch citizens' deposits in Icelandic banks, because it was clear Iceland's equivalent of the FDIC, or the Icelander taxpayer, couldn't cover the deposits. If you want to talk about causes, William Butler and Anne Seibert released a paper in October 2008, originally done in April 2008 but kept secret, that explained Iceland's problems. They were already very well known. In short, its banking sector was simply too extended for the size of its economy, and policymakers tried to sustain the unsustainable.
He says Canada has "energy and minerals," is "not overspecialized" and "is self-sufficient." These could easily apply to the United States; why is Canada any better? Now, Canada, or any other nation, cannot be insulated from the world, nor should it want to be. Self-sufficiency is the road to ruin, as the Hawley-Smoot Tariff showed us. It's good to have a fallback position so you can have another way to trade your goods and services with others, like a trader who can switch to driving taxis, not to provide everything for yourself.
But if we get hyperinflation and Canada will be the best place to be, how much more overloaded will its socialized health care system be? As the signs say, where will Canadians go for health care if they don't want to die waiting in line?
He's wrong about "developing a system." Anyone familiar with Hayek (namely the concepts of spontaneous order and knowledge being distributed throughout society) will understand why this line of thinking is as bad as central planners' belief that they can steer an economy in the right direction. It's flatly impossible for him, or any group of people, no matter how smart, to regulate things as he dreams.
For all his well-regarded philosophy, he doesn't understand that human information, as a whole, is imperfect. That's the nature of our existence, and unavoidable. Austrian economics explains that market processes exist as the mechanism by which we eliminate errors (q.v. Hayek's "Competition as a Discovery Procedure") and approach the harmony of supply with demand. Some people will have better information, not necessarily scientific facts as Hayek explained, but knowledge of time and place. Israel Kirzner developed his concept of the entrepreneur as someone who has better information and will put it to use, expanding on Schumpeter's concept of the risk-bearer.
And how does he plan to prevent things from becoming "too big to fail"? The free market tempers the size of a firm by allowing it to fail when overextended, which then becomes a warning to others. But he's talking about an active regulation, which is done only through government -- which would rely on imperfect bureaucrats and economists whose track record is abysmal.
I'm not impressed.
Posted by: Perry Eidelbus at September 17, 2009 10:38 PMPerry, I am 100% with you on Roubini and the permabears who have "predicted 12 of the last 5 recessions."
Taleb is an interesting --and different -- case. I think you would very much enjoy reading "The Black Swan" and you probably have to read it to see his complaint about economists. Economists, he complains, pretend that the world fits into nice Gaussian probability curves when many things do not.
Many things display a Mandelbrotian probability, and if you're expecting Gauss and get Mandelbrot, you are in for a big surprise.
His fund, developed around his beliefs, is not a super short bear fund, it is a CAPM model with a huge weight to low risk and a short percentage in outlier options that pay huge in large swings. He has done pretty well with it.
I don't worship at the altar or anything, but he is an interesting thinker and his book is certainly germane in 2009.
His book might be interesting if he sticks to economic thought, but as far as his "predictions," my point still stands: he was far too vague and general for his statements to have merit as prognostications. Red Sox fans had said for how many decades that their team would come back next year to win the World Series?
Modern economics (Taleb too?) largely forgets the Austrians, who recognize the imperfect nature of information. We don't along with the Keynesian, neo-Keynesian, neo-classical, etc. lines of thinking that oversimplify economic flows and assume equilibriums. Economics is nothing more than the science of human choice and its consequences, which will be chaotic. So Austrian economists fully expect that life will be closer to Mandelbrotian probabilities than Gaussian distributions, but uh, it's so obvious that Austrians consider it axiomatic. You don't need an entire book to talk about it.
I was taught to visualize things this way. Let's say you have sufficient data to chart a smooth-looking supply or demand curve. Now if you could zoom in closely enough, you'll see that it's not a smooth curve, but many infinitesimally small curves of their own (representing the choices of smaller and smaller groups until you zoom so closely that you see individual behavior). They all join together, end to end, to form the whole.
Taleb sounds almost Austrian when talking about his distrust of economists and central bankers, but then he starts talking about designing this system to minimize error. No human has the knowledge to design such a thing, nor should a person have that kind of power over others to create it. You let a system emerge on its own, out of a free society that doesn't have government trying to steer people one way or another.
Posted by: Perry Eidelbus at September 18, 2009 11:54 AMSeptember 15, 2009
Contrarian View on Monetary Policy
The Everyday Economist links to a superb essay in CATO unbound by Scott Sumner.
I cannot lie. (I could but I will not do it here.) This is a little lengthy and moderately turgid for the less academic of ThreeSourcers. But it pays big dividends in providing a brief overview of some leading monetary theories, and a serious look at the panic of 2008 from a fiscal and monetary policy perspective.
Then you get Sumner's suggestion of deflationary concerns and too-tight money's exacerbating the crisis, and then a very serious suggestion for a futures-based, automatic (Friedmanite) approach to central banking.
I'd call it a substantive return on your reading investment.
September 14, 2009
Quote of the Day
If you believe the Keynesian argument for stimulus, you should think Bernie Madoff is a hero. He took money from people who were saving it, and gave it to people who most assuredly were going to spend it. Each dollar so transferred, in Krugman’s world, generates an additional dollar and a half of national income. The analogy is even closer. Madoff didn’t just take money from his savers, he essentially borrowed it from them, giving them phony accounts with promises of great profits to come. This looks a lot like government debt. -- John C. Cochrane, in an awesome takedown of Krugman's Times Magazine article (that even IT people are quoting at me today!)Hat-tip: Don Luskin
August 28, 2009
Fairness and Efficiency
I didn't know if there was a quorum around here interested in Don Luskin's editorial on Flash trading and the ensuing contretemps. I assumed those who were interested were probably already up to date from Luskin's site and the WSJ.
But it has taken a turn into the philosophical today, as Luskin's coauthor has answered their critics with a smart response. While regulators think they live to make markets "fair" any non-coerced market is intrinsically fair. Hynes talks of making markets efficient, which is my interest. Capital markets don't exist to make people rich, they exist to direct capital to its best use.
Free markets don’t require equality of information. They require an absence of coercion, and protection against fraud. Free markets allow people and firms to develop expertise which create competitive advantages. Users of free markets who don’t care to develop expertise can still benefit from them. Wal-Mart customers, with no sourcing skills of their own, benefit from Wal-Mart’s efficiencies in the form of lower prices.Twenty years ago, retail stock traders had to call in orders and wait 20 minutes or more for reports. They might miss markets due to the lag between their broker getting an order and the order getting to the post. They could not have their bid or offer shown on NASDAQ. Spreads were a minimum of an eighth of a point, and often more. Today they can go to the web, enter an order and get an execution in seconds.
Follow this link to read the Hynes defense, which I think makes great reading whether you have read the rest or not. If you want to put your geek hat on, that post has links to the original editorial and Luskin's response.
August 17, 2009
There Once Was an Economist in Nantucket...
Professor Mankiw discovers pricing models during time off.
Ec10 students: completion of the limerick is left as an excercise for the reader.
August 6, 2009
Don't say I don't know how to have a good time!
I'm a huge fan of Dr. Deepak Lal of UCLA (I might have mentioned that once or twice...).
Here is a seven part (little over an hour) video lecture at the Adam Smith Institute on what caused the financial crises. It might not knock 30 Rock off the air or anything, but I found it enthralling.
Hat-tip: NRO
August 3, 2009
U Chicago 1, Notre Dame 0
The Everyday Economist celebrated Milton Friedman's birthday last Friday with one of my favorite clips:
Was Donohue incredibly polite to his guest, or merely speechless?
Hint: It's a rhetorical question.
Friedman hinted at this point at the end but I think he missed the hanging curveball on Phil's second question: Capitalism doesn't "reward ... ability to manipulate the system" unrestrained government does.
Posted by: johngalt at August 4, 2009 10:27 AMI'll try for a rhetorical answer:
This is what made Friedman so great. He did not yell or spew or get upset, whomever the interlocutor. He would calmly make a compelling and substantive argument for economic freedom every time, completely extemporaneously.
We need a few more of those.
July 27, 2009
Deng XioLaffer
Thousand Word Picture:
James Pethokoukis celebrates the Sino-American econo-summit today with a look back:
Chinese and American officials meet today in the latest edition of the “strategic dialogue” between the two nations. Here is an interesting 1998 take from Alvin Rabushka of the Hoover Institution about the role of tax policy in China’s economic ascent.
Let me get this straight. Cut tax rates, get more growth and revenue. You guys ever heard of that?
It's working here with the tax credit for new homes and the increase in new home purchases.
Posted by: GK at July 27, 2009 6:53 PMWhat I wouldn't give for a government that spends a LOWER share of GDP year over year. Who is the communist party candidate in 2012 anyway?
Posted by: johngalt at July 28, 2009 1:52 AMJuly 19, 2009
Dark Thought of the Day
Only 21% of the people in an econ4u.org could correctly answer "how many millions are in a trillion?" To win an election generally requires at least twice that. Am I the only one not feelin' so good?
Hat-tip: scrivener.net
The things we take for granted... "Everyone can recite the progression million, billion, trillion." I almost didn't watch the video. I know that lots of people have trouble with this. But this is truly breathtaking.
Posted by: johngalt at July 19, 2009 6:52 PM21% got it right. The other 79% voted for Obama.
Posted by: Boulder Refugee at July 20, 2009 3:17 PMWe've been having a lot of fun with this topic around the galt household. I was surprised to learn just how uninformed even my own family members are on this. The engineers amongst us have it locked. After all, we deal with kilo, mega, giga, tera, or alternately, milli, micro, nano, femto, and their ilk on a regular basis. We automatically think in those terms. But for some reason everyone else I asked seemed to have difficulty of one sort or another. So here's what needs to be repeated throughout the blogosphere:
1 million = 1 thousand thousands (1000 thousands)
1 billion = 1 thousand millions (1000 millions)
1 trillion = 1 thousand billions (1000 billions)
The easy way to remember this is just to recite the progression "million, billion, trillion."
Now, when I was a kid in grammar school I remember being taught that a billion was a number so big that "nobody can count that high." Carl Sagan and the Democratic Congress have proven that wrong but it is still a mammoth figure. (Think: 1,000 millionaires) But now this mammoth figure isn't big enough anymore. (A billion here, a billion there - pretty soon you're talking about real money.) Now the government and the press throw around figures in the trillions of dollars, but to most Americans those numbers clearly have no meaning. Let's try to give them some:
One (single, measley little) trillion dollars is enough to create a million instant millionaires.
For perspective, this is like one of every 300 or so people in the US winning a million dollar lottery.
Or, on a state by state basis, 200,000 new millionaires in each of the fifty states. Add another half a trillion to this and it's 300,000 new millionaires ... in EVERY STATE IN THE UNION.
Repeat after me:
Million, Billion, Trillion
Million, Billion, Trillion
Million, Billion, Trillion
More ... Bucks .. Taken.
July 17, 2009
Quote of the Day
It's pretty early in the day for making a call on QOTD, but this gem from Joe Biden is going to be tough to beat:
"We're going to go bankrupt as a nation," Biden warned at an event in the backyard of the House's No. 2 Republican."People, when I say that, look at me and say, 'What are you talking about, Joe? You're telling me we have to go spend money to keep from going bankrupt?" he said. "The answer is yes."
Unlike Joe, I'm speechless.
Hat tip: foxnews.com
3:07 PM Eastern and the Vice President still has a comanding lead.
Posted by: jk at July 17, 2009 3:08 PMYes, this statement from the Vice President of the United States is mildly embarrasing in its idiocy but it's not like he can't spell 'potato.' There's no reason for newspaper editors or columnists or TV anchors to bring this to America's attention (and tell us what we're supposed to think about it.)
Posted by: johngalt at July 18, 2009 10:09 AMFNC's Elizabeth MacDonald gave us her own QOTD nominee this morning in describing the Biden line:
"Biden is effectively saying to the American people, 'Pile into the back of my spaceship while I point it at the center of the sun.' No one, no one, not McCain, not Obama, would have won the election last year if they'd told the truth, if they said what John Rutledge said, if they were straight and stopped whipping fastballs by the American people the size of Jupiter. You know, the debt that we're looking at is gonna be three-quarters the size of our country's GDP. This is beyond faith-based economics, it's delusional."
Posted by: johngalt at July 18, 2009 11:41 AMJuly 14, 2009
DC to NYC: Drop Dead
New York's hegemony in financial services is under threat from Schumpeterian gales. But a bad regulatory environment could be far worse, says Luigi Zingales from the Chicago Business School:
If we look beyond the Americas to the broader world, however, New York’s enduring supremacy is not a foregone conclusion. Besides the power of inertia—people like to trade where others trade, so they trade in New York—the city has benefited from three comparative advantages in the past: a sophisticated and well-trained workforce, reliable but not intrusive regulations, and (at least since Ronald Reagan’s presidency) a favorable tax and political environment. All these advantages have shrunk, if not vanished.New York’s skills advantage eroded long before the 2008 crisis. Thanks to its early deregulation of brokers’ commissions in 1974, New York took the lead in the quality and reliability of trade. Global companies came to the city to be traded and judged by New York’s analysts. But during the 1990s, most European stock exchanges caught on. Their tardiness allowed them to adopt the most recent trading technology easily, and they moved faster and more decisively into electronic trading, creating markets that were at least as liquid as the traditional exchanges. Most of the daily trading in cross-listed companies—companies traded on both the traditional and electronic exchanges—moved back to the country of origin, eliminating one of New York’s advantages.
I daresay (and did) that when New York's Senior Senator defines innovation in financial services as "clever ways to dupe the consumers," it portends poorly.
Hat-tip: Mankiw
The status of "top financial city" is a matter of who wants it less. I guess New York has recovered the title from London, but for how long?
It's bad enough that D.C. evidently wants NYC to lose that status again. The city seems to want to drive people out, and the state seems to want to drive out non-city residents like me who work in the city. Albany has just finished raising taxes on everyone who works and buys things, down to a "payroll tax" of 34 cents per $100. (This is to bail out the transit system that's running itself into the ground because of UAW-like benefits for union workers. The tax is in all 11 counties served by the transit agency, so it affects people who don't even use public transportation.) But employers will pay that tax, right? Ha, yeah, just wait till I sit down with my boss in December to find out my paltry raise.
Greenwich is looking better and better, so NYC and Albany had better realize that people are as mobile as ever. Bloomberg, Paterson, Schumer and every last one of those dirty bastards had better realize that with the technology available to the financial sector, capital is even more mobile.
Posted by: Perry Eidelbus at July 14, 2009 4:41 PMJuly 10, 2009
President Coolidge Smiles Down
Harvard Professor Jeffrey Miron lays out The Case For Doing Nothing. And it is a compelling case indeed.
When people try to pin the blame for the financial crisis on the introduction of derivatives, or the increase in securitization, or the failure of ratings agencies, it's important to remember that the magnitude of both boom and bust was increased exponentially because of the notion in the back of everyone's mind that if things went badly, the government would bail us out. And in fact, that is what the federal government has done. But before critiquing this series of interventions, perhaps we should ask what the alternative was. Lots of people talk as if there was no option other than bailing out financial institutions. But you always have a choice. You may not like the other choices, but you always have a choice. We could have, for example, done nothing.
[...]
From the distributional perspective, the choice is a no-brainer. Bailouts took money from the taxpayers and gave it to banks that willingly, knowingly, and repeatedly took huge amounts of risk, hoping they'd get bailed out by everyone else. It clearly was an unfair transfer of funds. Under bankruptcy, on the other hand, the people who take most or even all of the loss are the equity holders and creditors of these institutions. This is appropriate, because these are the stakeholders who win on the upside when there's money to be made. Distributionally, we clearly did the wrong thing.
I found it difficult to choose excerpts because the whole piece is pretty good. I recommend a read in full.
Hat-tip: Mankiw
How dare anyone accuse anyone of operating under any kind of moral hazard!
Posted by: Perry Eidelbus at July 10, 2009 3:12 PMDamn. Where was rational thinking like this last September, when congress needed it? Hopefully this will help prevent another big bailout bill this September.
Posted by: johngalt at July 11, 2009 8:34 AMJuly 6, 2009
Quote of the Day
Louis Woodhill, on the Leadership Council of the Club for Growth, pens a somewhat technical but compelling (and disturbing) analysis that points to 14% unemployment. That alone could have been the headline for this post, but this beauty of a paragraph fairly screams QOD:
"Stimulus" is based upon the superstition that government borrowing and spending creates "demand". In reality, it does no such thing. "Stimulus" is like trying to raise the level of the Hudson River by dipping out a bucket of water, walking five feet downstream, and pouring it back in. The only difference between the Bush and Obama plans is that Obama's bucket is bigger (and will create more debt). Ironically, the July 2 jobs report prompted calls from leftist economists for Obama to go back to the river with an even bigger bucket.
Hat tip: RealClearPolitics.com
Bastiat's taught us this for only, oh, 160 years...
Posted by: Perry Eidelbus at July 6, 2009 10:49 PMStomping on the Green Shoots
An important turn of phrase, from Jimmy Bise: "Maybe We'd See Some "Green Shoots" if the Government Would Stop Stomping on Them "
In reality, the government is forcing small businesses to float the government a zero-interest loan to cover the insurance payment. The situation gets far, far worse when it comes to unemployment. As those of you who own a business know, when one of your employees files for unemployment, your insurance premiums go up. So what happens to those premiums now that unemployment insurance has been extended an extra 20 weeks? The government isn't picking up that slack. That money is coming straight from the businesses. So, says the blogger, he's far more hesitant to hire new employees, even if he could use a few new bodies, because the cost to hire, retain, and lose them is far too high.
This remains my concern. The American economy is powerful and resilient. I have no worries that it could bounce back from this contraction stronger than ever. But at the same time, Government seems to do everything it can to stop it.
I saw on the news that Colorado has enacted a new law that provides a $5,000/employee fine for first offense to an employer who miscategorizes a worker as a contractor. I think a lot of us have worked in very grey areas. And I'll even concede that it is a real problem. But to roll out a draconian solution like this in the middle of a recession is certain to provide less employment and fewer opportunities.
A labor lawyer on the news admitted that the laws are complicated. One of the big changes is to allow a worker to claim that he or she should be categorized as an employee to get benefits and withholding. Workers will be incentivized and empowered to turn their work providers in -- or just blackmail an employer.
As Bise points out, "jobs recovery" will come first from small business. Unless State and Federal government team up to squash them.
June 29, 2009
Now, Some Nasty Words about Lord Keynes
I found myself in the peculiar position if defending the Keynes multiplier last week. On this very blog. It was not any fun but I felt that it needed to be done.
To get my mojo back, I pass along a Mankiw post and a recommendation that you click through and read Scott Sumner's original post. Sumner details an incident when a young JMK was caught in a quick currency flip and leaned on friends and family.
Translation, without help from his rich daddy and rich friends, this cocky, arrogant, smart-aleck would have fallen on his face, ended up digging ditches somewhere and we would never have heard of him. But he did have a rich daddy, who bailed him out...
Interstin'... While on topic, click over to scrivener.net to read "An odd thing about Keynesian deficit spending:"
"Despite the fact that the economics of deficit finance began with the Keynesian Revolution, it has been conclusively established by Kregel (1985) that Keynes himself did not ever directly recommend government deficits as a tool of stabilization policy. Keynes played a conservative political hand and viewed budget deficits with a 'clearly enunciated lack of enthusiasm'."
That's true. He was a "fiscally responsible" liberal, after all, in the same way that Bill and Hillary, and Robert Rubin, are. Government can borrow and spend if it needs to, but preferably it'll just tax the hell out of people and control all the spending.
Posted by: Perry Eidelbus at June 29, 2009 4:08 PMJune 23, 2009
See you in the funny papers!
I can't possibly excerpt or link. Don Luskin has discovered, read, scanned, and commented on a circa-2000 comic book put out by the FOMC to describe its structure and operations.
Such is the sad state of affairs in our public education system; after teething children on Sesame Street and raising them on a steady diet of MTV, the best we can muster up for students with the attention span of a ferret on crack cocaine is textbooks in the format of comics. I guess textbooks are more palatable when there are lots of pictures.
Maybe the only way to get our message out to the next generation of economists is to have Pixar produce Atlas Shrugged, or find an anime version of The Road to Serfdom.
Wait, what?
Posted by: Keith at June 23, 2009 12:47 PMAs an earlier post suggested, we'd have the best results with a 20-something Infobabe spokesperson with big hooties.
Posted by: Boulder Refugee at June 23, 2009 4:11 PMI stand corrected; hooties trump cartoons every time.
...
Great. Now all I can think of is Jessica Rabbit teaching economics and civics.
Posted by: Keith at June 23, 2009 4:28 PMI'm not a strict constructionist, I'm just drawn that way.
Posted by: jk at June 23, 2009 4:38 PMDammit, Keith, you did it again - spluttered coffee all over the keyboard...
Posted by: Boulder Refugee at June 23, 2009 4:46 PMYou're not alone, Refugee - jk did it to me with the "just drawn that way" reference, so I guess my karma just caught up with me.
'Scuze me while I go for paper towels and Windex.
Posted by: Keith at June 23, 2009 6:30 PMJune 14, 2009
Animal Spirits
This is a good story. Myopic political hacks like me need to remember there are other plays outside of regulation. Until, of course, the government hears about it.
James Hamilton at Econbrowser explains the trade, which is handy if you do not have a subscription to the original WSJ story.
The short story is that a small investment firm in Texas sold Credit Default Swaps to large firms against some shaky real estate holdings. When they got more revenue than the asset they were guaranteeing, they bought the underlying debt and made it good. The big guys who bought the swaps are not amused:
It appears from the WSJ account as if little Amherst Holdings of Austin, Texas was happy to sell the big guys like J.P. Morgan Chase, Royal Bank of Scotland, and Bank of America something like $130 million notional CDS on a $27 million credit event, used the proceeds to buy off and make good the underlying subprime loans, and pocketed $70 million or so for their troubles. The big guys, on the other hand, paid perhaps a hundred million and got back zip.
One might speculate that that is why the big guys took TARP funds and Amherst did not.
Hat-tip: a good friend's tweet.
June 4, 2009
Staying Rich In The New Normal
PIMCO Managing Director William Gross offers some historica;l perspective, sound investment advice, and a bit of political punditry in a web address that is well worth a read.
I remember as a child my parents telling me, perhaps resentfully, that only a doctor, airline pilot, or a car dealer could afford to join a country club. My how things have changed. Now, as I write this overlooking the 16th hole on the Vintage Club near Palm Springs, the only golfers who shank seven irons into the lake are real estate developers, investment bankers, or heads of investment management companies. The rich are different, not only in the manner intoned by F. Scott Fitzgerald, but also in who they are and what they do for a living. Whether some or all of them are filthy is a judgment for society and history to make. Of one thing you can be sure however: over the next several decades, the ability to make a fortune by using other people’s money will be a lot harder. Deleveraging, reregulation, increased taxation, and compensation limits will allow only the most skillful – or the shadiest – into the Balzac or Forbes 400.
Hat-tip: a good friend via Twitter.
His Batting is Poor, But He's Also a Bad Fielder...
Francis Cianfrocca has a devastating column in Commentary. Where Larry Kudlow and James Pethokoukis see green shoots and mustard seeds. Cianfrocca sees high taxes, inflation and slow growth.
Since we must scale back fiscal borrowing as we move into the future, there are only two alternatives: to accept far higher levels of taxation, or to accept a U.S. economy that is significantly smaller and slower-growing than it would otherwise have been. (The consequences of the latter, of course,are high unemployment and less material well-being for individuals.)What would be a logical way to navigate between those alternatives? Adopt a high-tax policy that does as little as possible to burden highly-productive individuals, businesses and capital, thus lessening the impact on the size and dynamism of the economy.
But we already know that the President wants to do exactly the opposite. Faced with an evil choice between much higher taxes and a smaller economy, Obama is on track to give us both.
Hat-tip: Jimmy P
May 13, 2009
Great Post on Monetary Policy
Blog friend The Everyday Economist has a great post up yesterday that I would highly recommend.
It's a serious look at monetary stability and the plusses and minuses of different targets for Central Bankers. It is certainly accessible to any bright person irrespective of economics training and gets nicely to the heart of an under-discussed topic: what are the goals of central bankers?
EE got me hooked up with Bernanke's textbook, and I remain very comfortable with the idea of inflation targeting. I think the problem with the FOMC is the so called "dual-mandate" to target price stability and employment. I think a firm commitment to inflation would be sufficient. EE makes some good points for income targeting and I wouldn't object. But I think the problem is more the dual mandate which contains an intrinsic acceptance of the Phillips Curve rather than any difference between a price and income target.
Do yourself a favor and read the whole thing.
Whew. I'm not sure that word "accessible" means what you think it means.
But consider this: "Scott Sumner believes that we could have avoided the recession and simply experienced a burst of the housing bubble had we followed a nominal income target. I actually think that we might not have even had a housing bubble if we had a nominal income target (that allows for falling prices)." Alternately, could we have avoided both the recession AND the housing bubble with JK's October 1, 2008 'first, do no harm' prescription of government anti-meddling? [Like anti-matter, we can imagine it but can't seem to find it.]
"If you get the time machine and can go back, Terminator style, to fix our current problems, I would suggest:1. Rein in Fannie Mae and Freddie Mac. Set the way-back machine far enough to prevent their birth if you can, but at the very least pass the reforms that President Bush and (some) GOP legislators proposed in 2004 and 2005. Cut their leverage in half and you cut the current mess to a fourth.
2. Get Andrea Mitchell to dope Greenspan's tea and get him to raise rates to at least 2% before handing the reins over to Princeton Boy.
3. Strangle mark-to-market accounting in the crib. Bank regulation makes accounting a legal endeavor. These rules are too harsh and give short sellers too powerful a tool to take a bank down.
4. Laugh the Community Reinvestment Act out of Congress. Do not require banks to make bad loans, they seem to do pretty well on their own.
Get halfway there on all of those and there's no panic."
jk,
Thanks for the link. Also, it is somewhat ironic that I got you hooked on Bernanke's inflation targeting book when I am now unconvinced with that approach. However, there are elements of inflation targeting that I like. For example, the explicit goal allows the market to understand what the central bank is going to do as well as giving it the ability to evaluate whether or not they are successful.
The reason that I favor the nominal income target is because an exclusive focus on inflation can be misleading (perhaps I should write a post on that). What's more the nominal income target also serves to satisfy the dual mandate -- and without the inflationary bias.
JG,
Sorry.
In all seriousness, Sumner's point is basically that we could have avoided the recession in spite of the bursting of the housing bubble. I am not convinced that this is the case.
I will echo your point that government policy has not been anywhere close to ideal (see here, here, here, here, and here).
[Shameless plugging!]
Posted by: EE at May 13, 2009 2:46 PMI'm a serious skeptic on that one too, EE. Not only is housing a high value segment of the economy, it was (necessarily) tightly coupled with financial markets and institutions.
I'll leave serious critique of inflation vs. income targeting to Perry but what irks me about inflation targeting - as I understand it, the Fed manipulates the money supply to maintain a small positive rate of inflation in order to promote stability and prevent recession - is that the rate of inflation acts as a fee for the priviledge of using the currency. The collector of the fee is the issuer of the currency (the Federal Reserve Banks) and it amounts to a profit at the expense of the entire dollar based economy.
Am I off base here?
I'm not opposed to private business making a profit, except when it is a government protected monopoly. How about "Federal Reserve Dollars" competing with "Halliburton Dollars" and "General Electric Dollars" and "Uncle Eric's Gold and Silver Backed Dollars" none carrying the backing of the United States government?
Posted by: johngalt at May 13, 2009 3:15 PMjg,
You are correct in your critique of central bank-issued currency in that it generates revenue for the monopolist issuer. However, I don't know whether that fee is substantial enough to be my primary concern. I would prefer zero inflation, or more appropriately falling prices in a growing economy. For an accessible, yet thorough discussion of this view, see here:
http://www.cato.org/pubs/journal/cj28n3/cj28n3-1.pdf
This type of outcome can be accomplished using a nominal income target or through the method that you proposed -- free banking. I think that there is much to like about free banking. If you have a keen interest in this topic, I would recommend George Selgin's text, The Theory of Free Banking, and also his recent interview with the Richmond Fed.
Posted by: EE at May 13, 2009 3:29 PMI feel a bit hoist on my own petard with JG's quote. I'll stand behind it as a way to avoid the panic. But I'd have to swap #2 with #1 and admit that Inflation Targeting generally allowed the Greenspan Fed to provide easy money without setting the trip wires.
On free banking: I'm sorry gents, but Mister Hamilton's train left the station a couple hundred years ago. Perry and Josh will laugh that I root for Taney and Jackson against Nicholas Biddle when I read history, yet I get less excited about "fiat money" than any other guy in the land with a subscription to Reason.
I'll have to read more on income targeting, but I am concerned that it would have squeezed the life out of the 1990s expansion. Near and dear to my geeky, technological heart is the belief that the Internet bubble was an unalloyed good. I'll trade a brief and shallow 2001 contraction for the fruits of the dot-com days any day of the week.
Posted by: jk at May 13, 2009 4:04 PMjk,
Jackson is the hero in that story.
I'm am not sure why you think that a nominal income target would have restrained the 1990s boom. If real GDP is growing because of changes in productivity as it was during the 1990s (which I know will come as a shock to those on this blog who think that it was the Clinton tax policy), prices would fall. Thus, suppose that the nominal target is 3%. If rising productivity causes output to rise and prices to fall, you could have real GDP growing above the nominal target rate.
Again, Selgin's work is excellent on this point. This monograph specifically.
Posted by: EE at May 14, 2009 3:01 PMMay 4, 2009
New Protectionism
Hey, that tax revenue ain't gonna raise itself! President Obama is going to "take away the tax breaks that reward companies for moving jobs overseas." 'Bout damn time, huh? Who could possibly be against that?
When the President is speaking, hang on to what is left of your wallets and liberties. Professor Mankiw links to a Mahir Desai paper that exposes it as the "New Protectionism" that it is:
Tax policy toward American multinational firms would appear to be approaching a crossroads. The presumed linkages between domestic employment conditions and the growth of foreign operations by American firms have led to calls for increased taxation on foreign operations - the so-called end to tax breaks for companies that ship our jobs overseas. At the same time, the current tax regime employed by the U.S. is being abandoned by the two remaining large capital exporters - the UK and Japan - that had maintained similar regimes.
[...]
Similarly, the weight of the empirical evidence is that foreign activity is a complement, rather than a substitute, for domestic activity. Much as the formulation of trade policy requires resisting the tempting logic of protectionism, the appropriate taxation of multinational firms requires a similar fortitude.
April 30, 2009
Capital Tea
Some posts ago, The Refugee made a point that conservatism in the '80s was diminished by the MSM through non-reporting and condescension. He postulated that the tea parties were getting the same treatment.
This opinion piece by Arthur Brooks in today's WSJ would seem to bear that out. It contains some encouraging statistics.
Still, the tea parties are not based on the cold wonkery of budget data. They are based on an "ethical populism." The protesters are homeowners who didn't walk away from their mortgages, small business owners who don't want corporate welfare and bankers who kept their heads during the frenzy and don't need bailouts. They were the people who were doing the important things right -- and who are now watching elected politicians reward those who did the important things wrong.Voices in the media, academia, and the government will dismiss this ethical populism as a fringe movement -- maybe even dangerous extremism. In truth, free markets, limited government, and entrepreneurship are still a majoritarian taste. In March 2009, the Pew Research Center asked people if we are better off "in a free market economy even though there may be severe ups and downs from time to time." Fully 70% agreed, versus 20% who disagreed.
Blog Brother PE has often made the case against redistribution on moral grounds. According to Brooks, that's exactly the case that must be made.
I was just starting to post a link to the Brooks piece -- it is a compelling read. Allow me to tag along and provide the section a little farther down that I was going to excerpt:
To put a modern twist on the old axiom, a man who is not a socialist at 20 has no heart; a man who is still a socialist at 40 either has no head, or pays no taxes. Social Democrats are working to create a society where the majority are net recipients of the "sharing economy." They are fighting a culture war of attrition with economic tools. Defenders of capitalism risk getting caught flat-footed with increasingly antiquated arguments that free enterprise is a Main Street pocketbook issue. Progressives are working relentlessly to see that it is not.
Advocates of free enterprise must learn from the growing grass-roots protests, and make the moral case for freedom and entrepreneurship. They have to declare that it is a moral issue to confiscate more income from the minority simply because the government can. It's also a moral issue to lower the rewards for entrepreneurial success, and to spend what we don't have without regard for our children's future.
Enterprise defenders also have to define "fairness" as protecting merit and freedom. This is more intuitively appealing to Americans than anything involving forced redistribution. Take public attitudes toward the estate tax, which only a few (who leave estates in the millions of dollars) will ever pay, but which two-thirds of Americans believe is "not fair at all," according to a 2009 Harris poll. Millions of ordinary citizens believe it is unfair for the government to be predatory -- even if the prey are wealthy.
Posted by: jk at April 30, 2009 11:48 AM
It is very encouraging to see these kinds of ideas being discussed in mainstream publications by people who can influence GOP positions. (Almost as encouraging as seeng a British Petroleum TV commercial that advocates not only for wind, solar and biofuels, but oil and gas too!)
Dagny pointed out that the ideas expressed in the Brooks piece have appeared on these pages before. In the comments to a 2006 post dagny wrote:
"The second problem is philosophical (surprise). You are trying to defend individual freedoms on a collectivist basis. The reason we, “have the argument every time,†is that the majority of people including even you apparently have accepted the premise that the good or evil of a system is to be judged on a COLLECTIVE basis. This assumption allows any moonbat with an agenda to defend his policies on the, “my ideas are better for SOCIETY,†platform. Aka this time my Marxism will work. Your first paragraphs say that the classical liberal ideas result in better societies. This is true, but it is a by-product and not the reason why the ideas of Mises and Hayek are better.
Classical liberalism promotes individual freedom and that is the only standard of good that should be applied to governmental decisions."
AND ...
"As soon as you use the, “class improvement,†argument, especially as a primary argument, you are cutting out your own philosophical underpinnings. You have conceded the argument that governments should do some things because they are best for society. If idea X is best because it makes society better then I can suggest any idea X and insist that it hasn’t been tried exactly my way and it will make society better. This devolves into a he said/she said debate about how much curtailment of freedom is justified in order to make society “betterâ€. THIS is why we keep having the argument “every time.†Because EVERY Marxist really does believe that HIS idea will make society “better.â€
Freedom must be defended on an individual basis because then the latest Marxist idea X can be specifically, rationally, consistently and objectively refuted in terms of the freedoms it removes from specific individuals. Indeed, only individuals can possess freedom. (A “free society†is mere shorthand for a group of free individuals. Society is not an entity, it is an abstraction!) Individualism cannot be defended on a collective basis. To attempt to do so is philosophical suicide.
One cannot defeat an opponent’s argument by adopting it himself."
Go dagny!
April 23, 2009
TARP As A Second Budget
One of many good points in this clip from Kudlow & Co.:
Hat-tip: Don Luskin
April 22, 2009
Exploit-the-Earth Day
In 1970 a US Senator created 'Earth Day' to "inspire awareness and appreciation for the earth's environment." But this movement has since metastasized from "appreciating" the earth's environment to deifying it. As a result, any productive human activity can be villified as "pollution."
In contrast, Objectivist philosopher and publisher Craig Biddle wrote that the correct moral path is to celebrate "Exploit-the-Earth Day" instead. [email article - Click 'continue reading' for the full text.]
Environmentalism rejects the basic moral premise of capitalism—the idea that people should be free to act on their judgment—because it rejects a more fundamental idea on which capitalism rests: the idea that the requirements of human life constitute the standard of moral value. While the standard of value underlying capitalism is human life (meaning, that which is necessary for human beings to live and prosper), the standard of value underlying environmentalism is nature untouched by man.
For at least 45,000 years human beings have been exploiting the resources of earth and nature for their survival and prosperity. There is certainly no rational reason to quit now. In celebration of exploiting the earth I have created two original prints and I publish them here now for free public use.
There is no middle ground here. Either human life is the standard of moral value, or it is not. Either nature has intrinsic value, or it does not.On April 22, make clear where you stand. Don’t celebrate Earth Day; celebrate Exploit-the-Earth Day—and let your friends, family, and associates know why.
Hat tip: jg's friend, henceforth (and long overdue) to be known as 'brother' Russ.
{Hint: Right-click on 'save target as' not 'save picture as' below so that you'll get the high resolution versions.}
________________________________________________________________________
Op-ed from The Objective Standard
On April 22, Celebrate Exploit-the-Earth Day
by Craig Biddle
Because Earth Day is intended to further the cause of environmentalism—and because environmentalism is an anti-human ideology—on April 22, those who care about human life should not celebrate Earth Day; they should celebrate Exploit-the-Earth Day.
Exploiting the Earth—using the raw materials of nature for one’s life-serving purposes—is a basic requirement of human life. Either man takes the Earth’s raw materials—such as trees, petroleum, aluminum, and atoms—and transforms them into the requirements of his life, or he dies. To live, man must produce the goods on which his life depends; he must produce homes, automobiles, computers, electricity, and the like; he must seize nature and use it to his advantage. There is no escaping this fact. Even the allegedly “noble” savage must pick or perish. Indeed, even if a person produces nothing, insofar as he remains alive he indirectly exploits the Earth by parasitically surviving off the exploitative efforts of others.
According to environmentalism, however, man should not use nature for his needs; he should keep his hands off “the goods”; he should leave nature alone, come what may. Environmentalism is not concerned with human health and wellbeing—neither ours nor that of generations to come. If it were, it would advocate the one social system that ensures that the Earth and its elements are used in the most productive, life-serving manner possible: capitalism.
Capitalism is the only social system that recognizes and protects each individual’s right to act in accordance with his basic means of living: the judgment of his mind. Environmentalism, of course, does not and cannot advocate capitalism, because if people are free to act on their judgment, they will strive to produce and prosper; they will transform the raw materials of nature into the requirements of human life; they will exploit the Earth and live.
Environmentalism rejects the basic moral premise of capitalism—the idea that people should be free to act on their judgment—because it rejects a more fundamental idea on which capitalism rests: the idea that the requirements of human life constitute the standard of moral value. While the standard of value underlying capitalism is human life (meaning, that which is necessary for human beings to live and prosper), the standard of value underlying environmentalism is nature untouched by man.
The basic principle of environmentalism is that nature (i.e., “the environment”) has intrinsic value—value in and of itself, value apart from and irrespective of the requirements of human life—and that this value must be protected from its only adversary: man. Rivers must be left free to flow unimpeded by human dams, which divert natural flows, alter natural landscapes, and disrupt wildlife habitats. Glaciers must be left free to grow or shrink according to natural causes, but any human activity that might affect their size must be prohibited. Naturally generated carbon dioxide (such as that emitted by oceans and volcanoes) and naturally generated methane (such as that emitted by swamps and termites) may contribute to the greenhouse effect, but such gasses must not be produced by man. The globe may warm or cool naturally (e.g., via increases or decreases in sunspot activity), but man must not do anything to affect its temperature. And so on.
In short, according to environmentalism, if nature affects nature, the effect is good; if man affects nature, the effect is evil.
Stating the essence of environmentalism in such stark terms raises some illuminating questions: If the good is nature untouched by man, how is man to live? What is he to eat? What is he to wear? Where is he to reside? How can man do anything his life requires without altering, harming, or destroying some aspect of nature? In order to nourish himself, man must consume meats, fruits, and vegetables. In order to make clothing, he must skin animals, pick cotton, manufacture polyester, and the like. In order to build a house—or even a hut—he must cut down trees, dig up clay, make fires, bake bricks, and so forth. Each and every action man takes to support or sustain his life entails the exploitation of nature. Thus, on the premise of environmentalism, man has no right to exist.
It comes down to this: Each of us has a choice to make. Will I recognize that man’s life is the standard of moral value—that the good is that which sustains and furthers human life—and thus that people have a moral right to use the Earth and its elements for their life-serving needs? Or will I accept that nature has “intrinsic” value—value in and of itself, value apart from and irrespective of human needs—and thus that people have no right to exist?
There is no middle ground here. Either human life is the standard of moral value, or it is not. Either nature has intrinsic value, or it does not.
On April 22, make clear where you stand. Don’t celebrate Earth Day; celebrate Exploit-the-Earth Day—and let your friends, family, and associates know why.
***
In honor of Earth Day, I suppose we should remind everyone of the awesome power of green energy:
http://www.youtube.com/watch?v=OKcD_aLZ9EI
Well, okay, it's more of a bluish-green.
Posted by: Keith at April 22, 2009 8:20 PMHA! The people waiting with breathless anticipation remind me of the ones on the train in the 'Atlas Shrugged' tunnel scene.
Posted by: johngalt at April 23, 2009 12:33 PMApril 13, 2009
How Red the Sunrise is Getting
Don Luskin posts a political cartoon from 1934.
President Obama does fancy himself as FDR...
“Young pinkies from Columbia and Harvard?†Obama went to BOTH!
Posted by: johngalt at April 14, 2009 12:48 PMGreat Column on Fair Taxation
Former Press Secretary Ari Fleischer has a superb guest editorial today in the WSJ. (My brother-in-law always suggested that I looked like Mr. Fleischer -- maybe he can play me in the ThreeSources Movie). Fleischer says that as bad as Madoff's pyramid scheme was, the tax code is worse:
Picture an upside-down pyramid with its narrow tip at the bottom and its base on top. The only way the pyramid can stand is by spinning fast enough or by having a wide enough tip so it won't fall down. The federal version of this spinning top is the tax code; the government collects its money almost entirely from the people at the narrow tip and then gives it to the people at the wider side. So long as the pyramid spins, the system can work. If it slows down enough, it falls.
The piece recites the litany of what percentage of the payers pay what percent of the taxes. These figures can never see print too many times. But the important part is his contention that every worker needs to pay to remove the incentive for the poor to vote for bread and circuses funded by the rich. President Obama seeks to free the bottom 50% of tax obligations from 40% now.
Mr. Obama is adding to this trend with his "Make Work Pay" tax cut that means almost 50% of the country will no longer pay any income taxes, up from a little over 40% today. A certain amount of income redistribution in a capitalistic society is healthy, but this goes too far. The economic and moral problem is that when 50% of the country gets benefits without paying for them and an increasingly smaller number of taxpayers foot the bill, the spinning triangle will no longer be able to support itself. Eventually, it will spin so slowly that it falls down, especially when the economy is contracting and the number of wealthy taxpayers is in sharp decline.
Whole read thing the for sure. He has some good suggestions at the end (though they don't all pass Constitutional muster). It's clear, concise and comprehensive intellectual ammunition as we fight a more collectivist world.
Hallelujah. My t-shirt slogan for this one is:
NO REPRESENTATION WITHOUT TAXATION
although it leaves a bit to be desired. I'm trying to improve it along the lines of equitable, non-progressive taxation. Maybe:
EQUALITY NOW!
(In Taxation)
April 8, 2009
johngalt's 3 minutes of fame
On Monday I found it appropriate to share my popular March 9 post on "One Reason Governments Spend So Much Money" with Denver talk show host Mike Rosen. I suggested it was worthy of reading on air. On Tuesday he did so.
This link is to an audio recording of the entire 3rd hour of his show. The segment I'm in starts at 25:10 (it only takes a minute or two to download to that point) with my specific content starting at 27:50 (about 3.5 minutes long). No, he doesn't mention my name or the name of the blog but he did put the idea out on 50,000 AM watts from Denver.
UPDATE: Just the clip.
Excellent! Congratulations.
Posted by: Terri at April 8, 2009 12:22 PMDo I not have the secret talk show decoder ring? At 25 past on mine, some monotone caller earnestly suggests that Rosen should pour through the 29-page budget summary and maybe do a whole show on it... Right link? it opens in QuickTime in Chrome so it has no time display (I could pull it into my new video studio software)
Posted by: jk at April 8, 2009 4:45 PMThe full length is 39 minutes so your slider should be just under 2/3 of the way over.
I managed to make a 96 bps mp3 out of the important 3:30 but it is 2.5 mb and I get a "too large" message when I try to upload it. Suggestions?
Posted by: johngalt at April 9, 2009 12:59 PMPhilistines! Email it to me and I will FTP it. (And thanks for the tip -- nice.)
Posted by: jk at April 9, 2009 1:12 PMApril 7, 2009
Dubai Crash
A beloved (but rhymes with "tunecat") relative sends a link to a very interesting story in the Telegraph on the effects of the economic downturn on Dubai.
"The Dark Side of Dubai" really is good and well worth a read.
Dubai was meant to be a Middle-Eastern Shangri-La, a glittering monument to Arab enterprise and western capitalism. But as hard times arrive in the city state that rose from the desert sands, an uglier story is emerging. Johann Hari reports
Glad it's the Telegraph and not the Guardian, but the piece still suffers from rampant anti-capitalism and anti-consumerism. Hari says “Dubai is a living metal metaphor for the neo-liberal globalised world that may be crashing – at last – into history.” I would say that the ills he describes are not a failure of liberalism but a failure of despotism. For the MidEast, Dubai is a hotbed of freedom. And I would suggest that that accounts for much its economic rise. But the lack of real personal liberty as documented in the article prevents a solid foundation of prosperity from being created.
Even at best, it is going to be a marginal economy and likely to suffer great drops in a global downturn. He paints it as pretty dismal today, but I’d inquire whether he’d rather live in Iran, Syria or Saudi Arabia. At the bottom of the bust is it not one of the best countries in the area (excepting Isreal)?
I also have to take some exception to his overwrought examples. The first woman, Ms. Andrews is a pretty sad story. Over invested, lost it all and her husband died with a brain tumor. She admits they made foolish decisions. It is a sad story but she is living in her Range Rover and her designer clothes are creased. There are kids in Chicago whose designer clothes have never rubbed the leather seats of a Range Rover – talk about sad!
She lived the high life few on this planet has known, circumstances changed and she is in the soup. Sorry for her loss but can you remind me how this is allegorical of the fall of an international liberal economic order?
Mr. Hari seems more bothered by affluence than poverty. The lifestyle and all those *#%^@! malls receive more disapprobation than does the de facto slavery he describes. Ah yes, the workers have no rights whatsoever – but what really bugs me is the bored salesgirl at the Harvey Nichols.
Again, Dubai is Amsterdam in its neighborhood, but there is no concept of minority rights, equality, or structured government. Because the current sheik is content to let Dutch girls wear pink shorts and enforce general property rights, it is “game on” especially for a large amount of petrodollars from its neighbors with few choices. I don’t see a Dubai crash as a judgment on liberalism.
Definitely worth the read. Thanks JK.
Posted by: Terri at April 8, 2009 12:20 PMI got a thoughtful response from said relative, admitting agreement with most of my views. We both agreed it is an interesting mixture of freedom and repression.
Posted by: jk at April 8, 2009 5:22 PMApril 2, 2009
Mark to Market relaxed
Today President Obama hailed agreements at the emergency meeting of world powers Thursday as a "turning point in our pursuit of global economic recovery."
Balderdash! Here is the turning point in American, and therefore global economic recovery:
The changes to so-called mark-to-market accounting allow companies to use “significant” judgment when gauging the price of some investments on their books, including mortgage-backed securities. Analysts say the measure may reduce banks’ writedowns and boost their first-quarter net income by 20 percent or more. FASB voted 3-2 to approve the rules at a meeting today in Norwalk, Connecticut.(...)
Companies weighed down by mortgage-backed securities, such as New York-based Citigroup, could cut their losses by 50 percent to 70 percent, said Richard Dietrich, an accounting professor at Ohio State University in Columbus.
So there you have it. A 20 percent boost in first-quarter net income and losses cut by more than half with the stroke of a pen! (By a 3-2 margin, mind you.) But every silver lining has a cloud. The geniuses at FASB are letting companies back date the new rule for first quarter reporting, but not for 2008 year-end.
FASB rejected requests from banks to let them apply the fair-value change to their year-end financial statements for 2008. While the new standard takes effect for earnings reports filed at the end of June, FASB said companies could apply it to their first-quarter financial statements.
Can't have too much of a good thing, I suppose. Or perhaps they just want the 2008 "Bush era" data to look as bad as possible going forward.
JG: your final sentence hits the truth square in the ten-ring.
I've come up with the perfect economic recovery plan. Obama leaves the country for 48 hours, mark-to-market is relaxed, and the Dow shoots above 8,000. I say a trend has to be respected. Let's have Obama take an extended vacation overseas to practice his bowling while we start deregulating stuff. It could be economic paradise.
Posted by: Keith at April 2, 2009 3:53 PMApril 1, 2009
Phosphate Ban Spurs Rise in Smuggling
Spokane County, Washington banned the sale of dishwashing detergent that contains phosphates last July. Predictably, this ban has caused residents to resort to smuggling contraband Cascade and Electrosol from across the border in nearby Idaho.
As a result, there has been a quiet rush of Spokane-area shoppers heading east on Interstate 90 into Idaho in search of old-school suds.Real estate agent Patti Marcotte of Spokane stocks up on detergent at a Costco in Coeur d'Alene, Idaho, and doesn't care who knows it.
"Yes, I am a smuggler," she said. "I'm taking my chances because dirty dishes I cannot live with."
The Refugee has been unable to substantiate rumors of an emerging "phosphate cartel" and increased violence on the Idaho side of the border. When they outlaw phospates, only outlaws will have phosphates.
I was going to post this with the question "Do I own my dishwasher or not?" I think we both need to get out more.
Posted by: jk at April 1, 2009 4:12 PMa friend of mine living in Spokane says the cops have been ticketting people for years bringing back liquor and cheap cigarettes from Idaho....
He didn't speak up because he didn't smoke.
He didn't speak up because he didn't drink (much).
Now he's speaking up, because he likes clean dishes.
Me? I'd switch to styrofoam plates... damn the landfills!
March 26, 2009
Twice as many now believe 'U.S. evolving into socialist state'
Before Obama was elected president a good friend disputed our impassioned arguments that America is becoming a socialist country. "I've been to Europe many times and I know what socialism looks like. We're not there and we're not going there anytime soon." Every time I see him I resist the urge to ask him about this again. But TechnoMetrica Market Intelligence has been asking, and compared the answers now to those from last August.
A thumbnail summary of the results is that among Republicans and independents, the group who believes America is becoming a socialist country has doubled (from 1/3 to 2/3 of Republicans and from 1/4 to 1/2 of independents). Democrats, more eager to support the ideology than speak its name, were more likely to see socialism in our future under Bush than Obama.
The link is a brief essay and explains the results of the larger poll as representing three groups: Undeclared Socialists, Passionate Capitalists, and Hybrid Deniers. (Worth reading just to see those in the squishy middle called "deniers.")
JK & JG- You have taken everything I was going to say about the liberty/centralized power scale out of my mouth. Darn.
For the record, I am also a fan of those nice quandrant political scales. The one used by the Republican Liberty Caucus is my favorite of such sorts.
Posted by: T. Greer at March 27, 2009 1:42 PM
Yes, I found it ironic myself that I found so much common ground with the Ozark preacher. (Preachers ain't all bad, right Keith? :) The best parts of Christianity really are just Perry and the founder's 'Natural Law' and Uncle Eric's 'Juris Naturalis.' This is very similar to Rand's "true nature of man as a rational animal" development for an objective morality. As such, I'm on board.
If the "social conservatives" like Huckabee would just "get out of our bedrooms" they would find much less resistance to the balance of their values.
Posted by: johngalt at March 27, 2009 3:29 PMjg: The best parts of Christianity really are just Perry and the founder's 'Natural Law' and Uncle Eric's 'Juris Naturalis.' Ummmm... not sure I'll go that road; somehow I'm more comfortable saying the best part of Christianity is that it's objectively true in its claims, thereby appealing to the rational animal in me. On the other hand, I'm totally satisfied with Rand's "man as a rational animal" parallel, but as Christianity is not a blind leap of faith into the unknown so much as a well-informed, evidence-based faith.
jg, I find as ironic as you do the fact that you find more common ground with Huckabee than I do! What's clear is that you and I are running on some parallel tracks; the task of sorting people into Conservatives/Non-Conservatives can be as problematic as that of sorting them into Christians/Non-Christians. We've dealt with that more than once on my side; for a teaser, see this:
http://alhbible.wordpress.com/2009/03/15/what-is-a-christian/
One thing that's clear in both discussions is that neither self-identification nor media judgments are definitive. Complicating matters on my side, of course, is that the ultimate decider on who falls into which category have some longer-lasting consequences...
I don't have any children, but I'm going to have to check out the Uncle Eric books.
Posted by: Keith at March 28, 2009 3:19 PMI realize that this post is almost off the page and this is straying from the topic but I can't let it go. Keith states that Christianity is based on, "a well-informed, evidence-based faith." Please, Keith, can you explain what that means? My understanding is that the main definition of faith in religious terms is, belief WITHOUT evidence. I was raised Catholic BTW. I therefore have an overwhelming philosophical problem with this concept. If I am supposed to believe in God without evidence, who gets to decide what God says and wants? Unless God is speaking directly to me (and he hasn't) do I believe my priest? My Rabbbi? My Mullah? The Bible, which was written by men and re-translated many times?
Now we have a new can of worms. If I take what religion teaches without evidence, what else can I be talked into believing? Global warming? Keynesian economics? Multi-culturalism? Subjectivism in general?
So please tell me, what EVIDENCE am I supposed to base my faith on? This is not a rhetorical or sarcastic question, but one I have been asking for years to a chorus of ridiculous answers.
Finally, and on yet another subject, there has been a lot of traffic lately on the subject of, "Mark to Market," accounting rules not the least of which comes from my beloved. And as Keith says above, "Once again, I'm late to the table on a subject where I'm actually qualified to weigh in." I'm looking forward to a detailed "weigh-in" on this subject from an accounting perspective in the next month or so. But I claim that no one can expect such from someone in public accounting in the last 2 weeks of MARCH. So you can all look forward to a boring, expository filled with TLA's in the future.
Excellent comments, all. I'll be directing my personal contacts to this discussion. Huckster vs. McCain? C’mon, old news, let’s move along. The Preacher is good at what he is; let him reside there. I'd like to take up the discussion of political classifications, even hoping it gets its own post. I see there’s a Wiki article started on this.
1. I think classifications are useful, as people do want a 'team' to be on, to root for, and feel like they are in the game.
2. The way to get classifications into widespread use, is to get people to adopt them. Labels are assigned from the top down, a social model that nearly never works but that’s so easy, and feeds the egos of those from Rush 2 Obama; thus, their frequency. The easy part, btw, is what makes popularity in the media world, not the real world.
3. To get widespread use, they need to be simple and understandable.
So, I think two-axis (Lib/Cons. R/D, Socialist/Capitalist, etc….) approach is too divisive to get broad appeal. Even the very simple, 4-quadrant approach now adopted by RLC, as noted by TG (for more, see the end) I think is too complex.
I propose a three-axis model.
Economic Freedom
Personal Liberty
Moral(ity) Index
The first two are well known, hopefully well understood, and useful, powerful, pertinent, and rooted in our constitution. The third is where I’m moving into new ground, inspired by JK’s comments on morality and the need for force to back up the rule of law, even to create the peace necessary for it to develop, at times. I used a vague term for the third leg intentionally. I want those who participate to paint their own portrait of just what this implies. The overall thrust must once again be, as The Founders struggled with, how much power over these items must government be granted?
I think I need help from TS’ers. Probably first is how this is described: labels are bad as we all agree. “Classificationsâ€, “categoriesâ€, etc. are all too pedantic and scream “top down†with all the divide&conquer implications they deserve. “Parties†has been used and abused. I want a new word that evokes the concept of ‘teams’, much like Tiger Teams in the working world. It implies voluntary association, as well as a direction and progress in a way the term ‘focus group’ does not. Hmm, caucus is reasonable. What say you?
I grant TS the right to share my eMail address to any who wish to contribute off line.
As an aside, let me take a moment to proselytize on the 4-axis from Nolan’s ideas, and now adopted by the Rep. Liberty Caucus. It looks identical to the 4-quandrant scale used by the AfSG folks who picked up on Nolan’s ideas to start the 10-question, “World’s Smallest Political Quiz.†I was once vastly enamored of the idea, and the implementation. If this had some lasting affect, I missed it. Pity, since I think our 100-year experiment with the current party system has run its course.
Dagny and All: My apologies - as you can probably imagine, Sunday is a a busy workday for me, and I didn't have the opportunity to come back and participate in the conversation.
Out of respect for you, my gracious hosts, I'm going to not postjack ThreeSources and turn this into a theology blog. Instead, I'm going to invite you all to let me shift the venue for the faith part on this topic over to my turf here:
I hope y'all will forgive me the presumption, but I have taken the liberty of dedicating the thread to Dagny and JohnGalt, owing to it being their comments on this post and the "Virtue of Selfishness" post that prompted mine. The red carpet has been rolled out...
Posted by: Keith at March 30, 2009 5:35 PMMarch 25, 2009
Pitts: Elections Have Consequences
Congressman Joe Pitts has an interesting set of graphs showing party control of government vs the markets and jobs.
This one struck me as rather interesting.
The biggest upticks where when GOP control of the House and Senate occurred. I leave to the readers to decide if it's because of the luck (dot-com boom & housing boom) or mad skillz.
(tip to Lesa C)
The Unregulated Bailing out the Regulated
Michael Barone has a great column today in US News and World Report. He notes a little flaw in the current narrative of the need for more regulation. "[Geithner] is asking the most unregulated parts of the financial system—hedge funds, private equity firms—to bail out the most regulated part of the financial system—the banks."
Democrats like Barack Obama and Barney Frank, at least on the campaign trail or in sound bites, have portrayed the financial crisis as the product of deregulation. The solution, they say, is more regulation. In that vein Frank, one of the brainiest members of Congress, is proposing that the Federal Reserve become a regulator of systemic risk, with the power to regulate firms that because of their size or strategic position are of systemic importance.
As always for Barone, great stuff, plenty germane the day after the President told us the problem with AIG was that the governmnet didn't have enough authority.
Hat-tip: Instapundit
March 24, 2009
A Public-Private Partnership
A good friend of this blog sends a link. Arnold Kling explains the latest Treasury plan, in March terms:
Suppose that a week ago I had entered a March Madness pool, paid $10, and filled out a bracket.Suppose that right now my bracket is looking weak, with only about half the teams I picked to make the sweet 16 still in the tournament. I have not been mathematically eliminated from winning the pool, but I need extremely good luck the rest of the way. (Incidentally, this example is hypothetical. I don't follow college basketball, and I don't enter any pools.)
At this point, my entry is no longer worth $10. If I were to sell it, I might get fifteen cents for it. If I were a bank, my bracket would be a toxic asset.
Now, along comes Tim Geithner with a fistful of taxpayer dollars..."
You've read half of it, click through and finish.
jk: theoretically, it's kind of like putting these "toxic assets" in InTrade and seeing what people would be willing to risk against the odds of the asset paying off.
I think Mr. Kling is onto something - a creative, free-market way of selling off the assets to whatever willing buyers there might be out in the investing public. Could we put them into shiny aluminum briefcases and have Howie Mandel broker them off a la "Deal or No Deal"? Could we just peddle them on eBay? Seems to me eBay might be a good market for them; we could see what people will bid. Some buyers will get a bargain, and some will get worthless paper - but at least they're freely assuming the risk.
Picture this: Monty Hall says to you: "you're holding a March Madness bracket of questionable value. Do you want to keep it, or do you want to trade it for the check behind Door Number Two, where Timmy Geithner is standing?"
Posted by: Keith at March 24, 2009 6:51 PM
Another great one from Dr. Kling; his analyses are getting more and more lucid (and readable!) every year.
A great one from Kudlow was on TCS Daily last week (where I first found Dr. Kling) noting how the FASB rules changes to allow cash-flow accounting to prevail over the silly distressed last-trade mark-to-market will do as much to rescue the financial markets than anything Geithner is likely to propose, probably more.
Here's Kudlow's article, but it's still heavy on the heat and deft with the light: http://www.tcsdaily.com/article.aspx?id=031809A
Posted by: nanobrewer at March 26, 2009 7:43 AMThat won't work, nanobrewer, at least not for the government. That would be negating what government did to help fuel the crisis, when what government wants is to create new regulations to fix something it screwed up in the first place.
As I recently wrote on my own blog, the feds instituted mark-to-market accounting at the worst possible time. It was not a coincidence. I directly accuse the feds of doing it deliberately to blow things up, thus preventing banks from lending. Then the feds step in: "Say, you need capital so you can lend again? No problem, take some of ours -- but we want an equity stake in youse."
Posted by: Perry Eidelbus at March 26, 2009 10:05 AMOoooh, Perry, I try to stay away from the conspiracy-mindedness of the deliberacy of gummint actions. I prefer, in general, to lean towards the Heinlein premise: "Never attribute to malice that which can be adequately explained by stupidity."
Sure, there are elected officials who are Socialists, and others who are but don't realize or accept it. More specifically, I believer bureaucrats act to enlarge their own serving tray. One of the most important components of enlarging a bureaucracy is increasing its public image. M2M has been pushed around for a long time, I've been hearing about from Libertarian econoblogs for quite a while (and think it was active in some areas, previously). I think with the elevation of The One, all the liberal kooks are out of the woodshed at no time since Pandora opened that damned box.
So, no, I don't think the people who enacted M2M rules were out to destroy US Capitalism; if they were, then the rules would not have been reversed so quickly (hmmm, was it a quick reversal?)
Now, I do share you concern about those in the the ranks of the unelected; but usually they have to march to the speed of whomever is pounding the drums; the time of the Obamacons is quickly fading, I think.
Still, this is why those concerned with public liberty need to get out and preach the gospel of hard work and personal responsibility. I've been doing it for over 20 years, and got damn near hoarse by last September.
These current fiascoes were urgently needed to strip that many more megaphones away from the FraDodd's, and give them back to those that can speak to, and thereby expand the American experience.
I'll try to keep up here, as there's more to say and much, much more to do.
Posted by: nanobrewer at March 28, 2009 12:33 PMMarch 22, 2009
Quote of the Day
"In the United States calling someone a socialist is often an insult, striking at the heart of American individualism and raising the fear of government fingers in everyone's business." -- Reuters
But, but, where Joe Biden comes from, it's not called socialism, it's called "fairness"!
Theft is theft, no matter what euphemism is used.
Posted by: Perry Eidelbus at March 22, 2009 8:43 PMScranton, PA?
Posted by: jk at March 23, 2009 10:11 AMYes. You don't remember when he made that comment?
Posted by: Perry Eidelbus at March 23, 2009 12:23 PM"Socialism is for ants." -johngalt
Posted by: johngalt at March 23, 2009 2:40 PMJohn Galt,
This is actually not so:
http://www.nature.com/nature/journal/v446/n7132/full/446143a.html
March 18, 2009
"Subsidy Footprint"
Here's a new topic for Mankiw to ponder: Screw the "carbon footprint" nonsense (on the basis of Global Warming cum Climate Change being no more than a massive swindle - sorry TG, I'm still not convinced) and focus on the principle of subsidy inflows and outflows, for individuals and corporations.
A Bangladeshi blogger talked about it last July as 'Subsidy-neutral lifestyles and businesses.' He's got a good start but some of his underlying ideas are crap. (Such as "... some part of that fuel price is being paid by those poor kids ...") But he captures the essential idea in his closing paragraphs:
There is also another dimension. In many capital markets of the world, there are separate indexes that include only companies that fulfill certain kind of benchmark. For example, an investor who is looking for Sharia complaint investment, there is an index in NYSE that helps you do that. If you are looking for companies who are environmentally responsible (i.e. green), there are many services available to help with that.In line with this, in Bangladesh, some civil society or NGO organiation should offer a service to identify the amount of money that different business houses are getting as government subsidy, they get it through different generalized subsidy mechanisms of the government (e.g. fuel subsidy, electricity subsidy, water subsidy, etc) even though the business might not need it. Once that information is public, the individual companies can try to become subsidy-neutral. Once they become subsidy-neutral, only the amounts above that should be treated as tax-deductible CSR expense, if government wants to go that route.
Any takers for this initiative, to offer services to the individuals and to the businesses, so that they can become subsidy-neutral if they want to?
But this omits the other half of the subsidy-balance equation: How much did each business/individual pay in taxes, fees, regulatory compliance costs, etcetera, etcetera?
Let all the peoples of the world see an objective calculation of this balance - for individuals, for corporations, for governments. Then and only then can we engage in a conversation about "fairness."
I just fear that there is no one left worthy of fund inclusion. Probably for the best, as Milton Friedman reminds us, a Corporation's goal is to maximize value for its shareholders. Lobbyin' and subsidizin' is going on and you have to play with the rules as they are and not how you'd like them to be.
Posted by: jk at March 18, 2009 1:43 PMI don't think you're feelin' me, bro. If there were "no one left worthy of fund inclusion" then where do subsidies come from?
An objective assessment should find that the aggregate "subsidy footprint" of the planet is necessarily ... zero.
Posted by: johngalt at March 18, 2009 4:02 PMMarch 9, 2009
Why politicized economic development is dangerous
I recently wrote on the danger of politics driving scientific research. The obvious case of this now is all of the government "investments" being proposed in the name of "saving the planet from irreversible damage due to climate change."
But even if man-made climate change was real (sorry tg, is real) and even if "renewable" energy sources were beneficial to counter it, the least effective entity to make them a reality is - wait for it - government.
Consider the following essay on "One Reason Governments Spend So Much" from the 'Uncle Eric' book: Whatever Happened to Penny Candy?
Industries generally develop in three stages. First is scientific feasibility, second is engineering feasibility, and third is economic feasibility.Using the airline industry as an example, the question in the 1800s was: "Is long-distance air travel possible?"
In the 1800s, balloons were already in use but were not practical. The problem to solve was the heavier-than-air machine.
The Wright Brothers in 1903 proved scientific feasibility. They risked their time, money and lives to show that a heavier-than-air machine could fly.
Lindbergh, in 1927, proved engineering feasibility. He risked time, money and his life to show that long-distance air travel was possible.
This gave investors enough confidence to risk their money in the aircraft industry. In 1935 the Douglas Company came out with the DC-3, which was the beginning of economic feasibility.
The modern airline industry resulted from all this risk-taking. Today, a middle-class American can go anywhere in the world much faster, and in much greater comfort, than a Roman emperor could. Travelers fly because the benefits are greater than the costs. This is economic feasibility.
This three-step model explains why governments are terrible at economic development. The "experts" who comprise the government gamble with other people's money, so they tend to confuse scientific and engineering feasibility with economic feasibility.
Once science and engineering prove something can be done, those who comprise the government will do it - even if the costs are greater than the benefits. [emphasis mine]
This economic development of the economically unfeasible is precisely the modern story of:
Wind power
Solar photovoltaic power
Ethanol (both glucosic AND celluosic)
Biodiesel
Hydrogen fuel cells
Dual-mode hybrid cars
The list goes on...
Just to add to the entertainment value: "But even if man-made climate change were real..." is the grammatically accurate construction. Heh.
JohnGalt: great post, and the model of three-stage development makes plain, even to a poor, dumb country boy like me, why government-run economic development doesn't work. And to boot, it's much more elegant than me just saying "a government that can't even balance its own checkbook has no business fiddling with the economy."
I'd only propose one small change to the quote rfrom the essay. Where the author wrote "Once science and engineering prove something can be done, those who comprise the government will do it - even if the costs are greater than the benefits" in the last paragraph, it seems to me that the last phrase should omit the word "even" and the hyphen, thusly: "... those who comprise the government will do it if the costs are greater than the benefits." If the benefits are greater than the costs, entrepreneurs and private industry will do it, without the necessity of government meddling. Profit motive being what it is, and all that.
Ergo, government will ONLY do it if its benefits do not justify its costs, and that applies to every item in your list. QED, yes?
Posted by: Keith at March 9, 2009 3:18 PMAhh, the punchline from a great old gag can be trotted out:
I congratulate Keith on his use of the subjunctive.Posted by: jk at March 9, 2009 4:32 PM
Thanks, jk...
Say, on the subject of government and the economy, I've been reading in the news today that Warren Buffett has been quoted as saying the U.S. economy "fell off a cliff." I've read that three times today, and every time, all that comes to mind is...
"It was pushed."
Posted by: Keith at March 9, 2009 5:11 PMWellll, I was trying to have some fun with TG, saying "was" as in "past tense" ... before it was largely discredited, then replacing it with "is" as a sop to him since he's not yet comfortable with the "denier" badge of courage.
I admit - sometimes my jokes trip over their shoelaces.
Oh, and yes, I do fully agree with your improvement of the closing paragraph. Well done!
Posted by: johngalt at March 10, 2009 12:25 AMTough room, jg, you know that as well as anyone.
Posted by: jk at March 10, 2009 1:34 PMEh, I though the post was funny. I also think you have highlighted one of the biggest problems with the Eco-stimulus crowd. What they call progress is in actuality a retardation (word?) of Western civilization.
Posted by: T. Greer at March 11, 2009 12:19 PMMarch 6, 2009
Worse Than The Great Depression
Did we need more bad news right before the weekend? Don Luskin has got it.
Over the last couple years I loved to ridicule all the scaremongers who always said this, that or the other thing is “the worst since the Great Depression.” I stand by my ridicule, for the most part -- those prophets of doom were mostly broken clocks who look right now just by sheer luck. But there's no question now that things have gotten quite bad in the economy and the markets.So let me do the preachers of Armageddon one better. Today's stock market isn't just the “worst since the Great Depression,” like they're so fond of saying. No, it's even worse than the Great Depression.
[...]In other words, to be no worse than the catastrophe that happened to stocks in the Great Depression, the S&P 500 today would have to rally 17%.Which it ain't doin' (S&P500 up 0.83). Read the whole thing.
UPDATE; Original post said "DJIA down 97 and change." I needed a browser refresh. ThreeSources apologizes for the error.
Fascinating graph. But I think there are some errors.
I read "-56.4% loss to date" and "-49.0% loss in the Depression, to this day." The index is then only 7.4% below the Depression pace, not 17%. right?
And how can the loss "since stimulus enacted" be larger than the loss "since Obama inauguration" since it didn't go up in the interim? I think those two numbers may be reversed.
Again though, fascinating perspective. Democrats will tell you it was down 50% before Obama had a chance to start "fixing" it. And 40% before he was even elected. But save the banking crisis in Sept-Oct the loss is a series of steep declines every time Obama got his way with something. Perhaps it would be good for America if he failed once in a while.
Posted by: johngalt at March 7, 2009 11:37 AMMark-to-Market Accounting (and other Arcania)
Steve Forbes was on Fox's 'America's Newsroom' with Megyn Kelly this morning advocating the repeal of the "mark-to-market" accounting rule. He said it was rescinded in 1938 by FDR and led to economic recovery at the time - doing so now to reverse the Bush administration's return to it would have a similar benefit, he claimed.
I'm sympathetic to this cause based only on what I've learned from watching news stories over the last many months, so Forbes' plea to "call your congressman" because the president can change the rule by executive order got me back on the 'net to learn more.
According to Wikipedia, "Mark-to-market" was instituted by FASB's FAS 157 effective for fiscal years starting after November 15, 2007. It required assets to be valued on balance sheets for what they could be sold for, not their maturity value. [This is my non-financial professional interpretation of a bunch of technical jargon.]
In last year's TARP bill responding to the banking crisis was the authority (section 132) to suspend mark-to-market. Section 133 also directed SEC, Federal Reserve and Treasury to conduct a study on the policy and report back to congress within 90 days. SEC issued a report on December 10, 2008 concluding that mark-to-market would remain.
In the interim FASB issued new guidance that attempted to show how mark-to-market should be applied to determine the fair value of an asset "when the market for that financial asset is not active." Essentially, although the valuation should be made based on market value at the time it should reflect "the price that would be received by the holder of the financial asset in an orderly transaction (an exit price notion) that is not a forced liquidation or distressed sale at the measurement date."
Even in times of market dislocation, it is not appropriate to conclude that all market activity represents forced liquidations or distressed sales. However, it is also not appropriate to automatically conclude that any transaction price is determinative of fair value. Determining fair value in a dislocated market depends on the facts and circumstances and may require the use of significant judgment about whether individual transactions are forced liquidations or distressed sales.
To my untrained eye there appears to be much hocum, wet-finger gauging and other assorted subjectivities inherent in the rule. By way of example:
In determining fair value for a financial asset, the use of a reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available.
and
Broker (or pricing service) quotes may be an appropriate input when measuring fair value, but they are not necessarily determinative if an active market does not exist for the financial asset.
So the question is, "Is this any way to run a transparent free-market?" Seems more like job security for accountants and auditors to me. What was so bad about mark-to-value in the first place that we had to employ this inanity? There's some intelligent-looking discussion of it here.
Help us Perry! You're our only hope!
UPDATE: Hate to but in another's post, but Forbes has a guest editorial in the WSJ today which collects a lot of this.
Search your feelings, young padawan. You know what I say to be true.
The dark side surrounds us. Ever-vigilant we must be, if we are to overcome.
"He said it was rescinded in 1938 by FDR and led to economic recovery at the time"
This is nonsense. Forbes can't even get his facts straight, unless he's talking about the "recovery" that was (a) only statistical and (b) was as good as a physical therapist helping someone to walk again after the therapist hit him with a car. Real recovery didn't occur for nearly another full decade, and not just because one accounting rule was repealed. We don't need the government to stop making rules for businesses: we need to STOP the government from making rules for businesses.
However, repealing it is a start, though don't hold your breath. Those of you familiar with me and my writings know that I've called this a crisis perfectly engineered by government. Purposely caused and well-planned. The institution of mark-to-market was timed to make everything blow up at once, so we won't see it reversed until the damage is truly catastrophic.
I'm not an accountant, but I take a simple Austrian view: let buyers and sellers agree on whichever method works best for them. I personally view the clash over accounting methods as a red herring. It's coming down again to government setting rules that could very well be wrong. Both have strengths and weaknesses.
Mark-to-market realizes that we may not know something's true future value, so at the time we can only value it based on a current market price. Mutual funds' NAV, and margin account values, necessarily go by MTM. Part of my job is approving employees' personal investments based on being low enough that they won't negatively impact our clients' trades, and when they're trading options or futures, we go by what's effectively MTM. The problem is when you bought something for $1 million, and if it declines in value, mark-to-market means your books will show a loss. But in fact, you won't experience a loss unless you're actually trying to sell the whatever at that moment. If I buy a $500K house that in a year is worth less, even if it's down to zero, that doesn't necessarily mean I'll go bankrupt.
Now when you're dealing with something illiquid and/or uncertain in value, mark-to-model is useful. But even so, it inherently leaves people free to value changing/uncertain prices pretty much at whatever they want. Warren Buffett's been to correct to call it "mark-to-myth," although not to the extent he'd like us to think. But a lot of investing companies have used it to hide losses in their investments, and if they had had to report things based on mark-to-market.
In the end, we need not complicate things with accounting methods. We need only to let buyers and sellers be free to agree on a price, and for each side to accept the consequences of the decision without using government to coerce others into bailing out one or both sides. Putting this into an example, if you're going by mark-to-model in what you're offering to sell me, but I insist on mark-to-market, we of course won't agree. But it's not the accounting method that's important, it's the *price*. Value is subjective, however you calculated it.Do you see how well this works? If you sell me a widget that the market says is worth $1, but I think it will be worth $10, I might offer you $2. You can value it at $2 or $3 on your ledgers, and call it "mark-to-model" or whatever you want. All it matters is that I can buy it, and you can sell it to me, at a price we agree on.
If I run a bank, and certain assets are worth zero on the current market, taking my bottom line negative, but I have a billion in cash, why shouldn't I be able to make loans? Our financial officers need only record the assets properly in our books, with two sets of values. If there's fraud, e.g. a willful misrepresentation of material facts, there were plenty of laws prior to SarbOx that punish such wrongdoing.
If a bank's owners don't like what management is doing, if they feel that money is being lent out imprudently when the assets are unlikely to recover, then they can fire the management. There is always some way for the free market to hold people accountable, without the government having to step in with its absurd rules.
Posted by: Perry Eidelbus at March 6, 2009 1:20 PMThe answer is no, as in no way to run a free market.
However, once you have let the gub'mint in (insuring deposits, enforcing leverage ratios, &c.), you are stuck with their regulatory arm. Unlike the stimulus, it is not some evil scheme foisted on us to kill capitalism. If the government is responsible for margin requirements and leverage ratios, they make the rules about how assets are valued.
Put me down with Forbes for rescinding it, however, just another unintended consequence of government intrusion. Once the feeding frenzy begins, mark-to-market certainly amplifies it.
Posted by: jk at March 6, 2009 2:33 PMCase in point: Enron. While I completely agree with Perry's sentiments, it does no good for investors who "lost their entire life savings" to see the fraudsters frog-marched off to jail. Even if the punishment DID fit the crime (which it doesn't) those people have still "lost everything."
Qwest's Joe Naccio just lost his legal appeal for insider trading which netted him (and his wife) many millions of dollars so what's his punishment? 6 years in a country club prison. How many of us wouldn't take that deal if it weren't illegal? (Hell, I spent that long in a bad marriage!)
All told the solution appears to be, make the punishment for fraud more severe (longer terms in dirtier jails) and DIVERSIFY YOUR GORAM PORTFOLIO!!
Posted by: johngalt at March 7, 2009 11:49 AMFebruary 26, 2009
Escher Economics
Awesome, click to see more:
Hat-tip: Mankiw who titles it "Ricardian Equivalence." I'd call it "Deadweight Loss."
February 24, 2009
Don't Sully That Reputation
No one will dispute the piloting skill and heroics of Chesley "Sully" Sullenberger. However, The Refugee respectfully encourages him stick to flying and forget economics.
During recent testimony before the House Transportation and Infrastructure Committee, Capt. Sullenberger bemoaned the payroll plight of pilots.
US Airways pilot Chesley "Sully" Sullenberger told the House aviation subcommittee that his pay has been cut 40 percent in recent years and his pension has been terminated and replaced with a promise "worth pennies on the dollar" from the federally created Pension Benefit Guaranty Corp.
...
The reduced compensation has placed "pilots and their families in an untenable financial situation," Sullenberger said. "I do not know a single, professional airline pilot who wants his or her children to follow in their footsteps."
The Good Captain traced the problem back to airline deregulation in the 1970's. Ah. There we have it: if we could just bring back some old time government, he could still be benefiting from the artificial market created by bureaucrats - at the expense of the millions of consumers, of course.
Before we pass the hat through coach, however, let's look at his assertions objectively. First of all, there's no doubt that pilot incomes have fallen as airlines have tried to find a sustainable business model. However, 2008 data indicates that salaries for captains of A320/737 class aircraft ranges from $123,000 to about $200,000 depending upon airline. 747/777 jockeys make substantially more. US Airways is on the lower end of the scale. But even so, these individuals are well within the top 10% of all wage earners.
Untennable financial situation, sir? If you're in the top 10% of wage earners and can barely scrape by, then you either don't have any concept of true poverty or need to hire a money manager. Moreover, why not change to a higher-paying airline on a higher-paying ride? A top pilot with 19,000+ hours surely has some job mobility.
Secondly, his testimony implies that flight safety is at risk. Facts speak differently. Commercial flight fatalities have declined since deregulation despite a huge increase in the number of flights. Air travel has never been safer.
Capt. Sullenberger does not often mention that he was educated entirely on taxpayer money at the U.S. Air Force Academy, a $400,000 value in present dollars. He also learned to fly in taxpayer-paid planes costing thousands of dollars per hour all while receiving a pretty decent officer's salary and benefits, again at taxpayer's expense. The Refugee begrudges none of this, but this is a ride available to only 1 in 100,000 students with no residual student loans.
Again, with respect, the taxpayer has already done his part to support Capt. Sullenberger. Yes, his flying skills are magnificent and actions on the Hudson heroic. It was also the job that he was trained and paid to do.
Ahem, here's an economics lesson for Sullenberger, and because he's so stretched on a meager income, I won't charge him a dime.
Richard Branson, yes that one, offered to hire Sullenberger for Virgin Atlantic. Not at whatever salary Sullenberger demands, but at double what anybody else offers -- and a pilot position on Branson's spaceships. Apparently Branson made the offer in public, not directly, and Sullenberger was unaware of it. I take it that the offer has not yet been accepted.
Prices are ultimately determined by competition, and at the margin. It isn't only what you're willing to pay for something, but what the next person is willing to pay. Conversely, it doesn't matter what someone is willing to pay you, but what the next person is willing to accept for providing substitute goods or services.
This means for airline pilots that there are enough of them who are willing to accept the pay cuts. Otherwise, by definition, airlines would have to keep offering higher salaries and benefits until the market cleared (when the number of bought items equals the number of items offered for sale, i.e. the number of hired airline pilots equals the number of desired pilots). Prices will not necessarily be the same for every unit sold over any given period of time: prices can fluctuate based on current demand for a limited or ample supply, as we see with oil prices. So if a particular airline needs just one more pilot and wants one really, really badly, they might offer $200K to someone who will start right away (as opposed to cancelling several flights because of a manpower scarcity).
But in fact with airline pilots it's been the reverse: there is sufficient supply that airlines have been able to cut their salaries, as part of broader cost-cutting measures, yet retain sufficient manpower. As remarkable and downright heroic as Sullenberger was, there just isn't that much demand for his particular expertise compared to the available substitutes of competent pilots who can do ordinary flying. Yes, it would be nice if all pilots had his skill, but that's just not going to happen. The increase in salaries would make airfare too expensive: fewer passengers lead to half-empty planes, leading to schedule reductions, leading to layoffs of these super-qualified pilots.
Sullenberger's complaint isn't that his pay isn't what he'd like it to be, but that his pay isn't what he'd like it to be while staying at his employer. At the end of last year, I turned down an opportunity at another firm for double what I'm making now. It would have been a more senior position with considerably greater responsibilities, and my particular area of compliance is also very high in demand right now. I wasn't afraid of the "big chair," but rather that I'd be working for a bank. First, I can't stay true to my principles when working for a bank receiving TARP money. Second, being at a major asset manager is a lot more stable in bear markets; I didn't want to risk getting laid off after 6 months because the bank had a couple of bad quarters. Third, it was too much of a risk to leave my current environment, where I get along great with my boss and team and implicitly trust them, for a boss I might hate like none other (or even if I like the person who hired me, I might get a new boss I hate).
So I voluntarily accepted an effective pay cut to stay where I am. Sullenberger did too, and he has no cause for complaint.
Posted by: Perry Eidelbus at February 25, 2009 10:17 AM"It will be a great day when AIRLINE PILOTS get all the money they need and the air force has to hold a bake sale to buy a ... oh, wait a minute."
Posted by: johngalt at February 25, 2009 12:38 PMShort the U S of A?
Financial markets shuddered Monday with the Dow Jones Industrial Average falling 3.4% to 7114.78 -- or nearly half the peak it hit just 16 months ago -- even as the Obama administration tried to quell fears about the viability of major U.S. banks.The decline in the stock market was unusually broad and went well beyond the jittery financial sector, with technology and other economically sensitive categories driving major indexes to their lowest closing levels in more than 11 years.
Much as I love to study sophisticated investment vehicles and absorb wisdom from Kudlow guests, I have to admit to being the dullest, old-lady, dollar-averaging, broad-index investor on the planet. My 401K choices are a bit limited, so I do ETFs for S&P500, S&P600, and a non-aggressive international fund. For my wife's IRA, we invest lump sum once per year and can choose any investment except rare guitars (there's probably an ETF, I shouldn't jest.) So I get a little more colorful there. My big idea last year was to go heavy on Financials -- how much worse could they go? Oh. That much.
On one hand, I am a Kudlowite optimist. The dynamic free market engine of world prosperity will win in the end and a long term bet against America is not historically wise. The other hand sees protectionism, überregulation, preternaturally progressive taxes on income, investment and capital -- all in the midst of a downturn that cries for the exact opposite.
I'm thinking of going short with half this year's contribution and putting half in Taleb's Black Swan fund. A little hedge against a further downturn that seems quite possible. I would love to hear what ThreeSourcers think. How bad is it gonna get and what to do?
UPDATE: The editorial page is a little less kind, invoking Casey Stengel's "Can't anybody play this game?"
The latest example came yesterday, when equity markets showed early strength after a dreadful week when they had fallen nearly 6%. Then investors started to absorb a three-paragraph morning statement from five branches of the Obama financial regulatory team asserting that the government "stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses." Stocks headed south around 10 a.m. and didn't stop until they'd lost another 3.4% or so. The nearby chart of the Dow since Election Day is a running tally of ebbing confidence in the new Administration.
February 22, 2009
"Where's their answer to this?"
A number of ideas over the past weeks have come together for me this morning-
In response to the letter I sent to my Senators opposing H.R. 1 a beloved cousin emailed me, "I’m not saying I disagree or agree with you when I ask this question…. But what would you suggest? I don’t really know what the right answer is at this point…"
The first line of my reply to her was, "Well, on numerous occasions in the past we've cut tax rates in an attempt to spur economic growth and every time that's been done the economy improved and net tax receipts increased, despite the lower rate of taxation."
Then the shamulus bill passed and a number of Republican governors, upon seeing the fine print, began suggesting they'd refuse the federal handouts. "Republican governors, as the last bastion of capitalist political power in this country, should implement a capitalist plan for job creation - eliminate the corporate income tax" I thought. By doing this in one or more states there would be a side-by-side comparison of capitalism versus government bailouts that would be difficult to ignore on the key statistics of job growth and state GDP growth.
But I wondered which states have a Republican governor AND a corporate income tax that could be axed?
This morning Tim Pawlenty and Mark Sanford appeared on Fox News Sunday with Ed Rendell and Jennifer Granholm to discuss the "stimulus" bill. Among other things, Sanford called The Big O's foreclosure plan "a horrible idea." Last week Sanford suggested that his state might "turn down stimulus money" from the feds. In that L.A. Times story real estate agent Joyce Rivas claimed to have voted for Sanford twice but was angered by his "threat." Rivas asked, "For starters, where's their answer to this?"
In a quick search I found that Governor Sanford proposed, last December, elimination of the 5% South Carolina corporate income tax.
Lawmakers and observers said eliminating corporate income tax is an interesting idea, but want to hear more details.(...)
South Carolina could join four other states, Nevada, South Dakota, Washington and Wyoming, with no corporate income tax, Sanford said. South Carolina collects about $300 million in corporate income taxes annually, far less than sales and individual income tax collections.
“We’ve got to get away from this piecemeal approach to jobs incentives,” Sanford said in a written statement. “We believe a better approach would be to simply lower the overall tax rate for corporations, so that we’re not only giving companies a good deal when they decide to locate here but we’re giving them a reason to stay and expand.”
There you are, Ms. Rivas. That is our answer.
For reference: Tax Foundation's 'State Business Tax Climate Index Rankings' Maryland... ouch!
I watched that show as well. Let me just say "Sanford for God!!!"
I have heard for years about how impressive (and telegenic) Governor Granholm is. "Don't amend the Constitution for President Aahnold," they said, "it will backfire and you'll get Democratic President Granholm." Watching her today, I don't think either of them should start measuring drapes. (For the record, I would support an amendment allowing a naturalized citizen to be President and for the record my naturalized-citizen wife would not. There you go.)
You can see where these former industrial giants of states get the "former" though I confess to liking Gov. Rendell's style. Gov. Granholm will gladly take her money and South Carolina's and yours and yours and yours and yours.
...and another thing!
This humble little blog has mentioned several things that would be wildly more effective and far more conducive to liberty. Holidays on cap-gains taxes, elimination of the corporate cap gains tax, increased immigration and the payroll tax holiday would all be wildly stimulative. None would grow government's size and influence.
Posted by: jk at February 22, 2009 7:19 PM...but whadda WE know. We're just "the people."
Posted by: johngalt at February 22, 2009 11:31 PMFebruary 20, 2009
Oh Canada!
A light snack for the weekend.
Awe. Some.
Born in Canada, eh? Can't be president? Amendment time.
Posted by: jk at February 20, 2009 4:33 PM21st Century Paul Revere
I'm dubbing CNBC's Rick Santelli the Paul Revere of the 21st Century, and his clarion call is "The looters are coming! The looters are coming!"
Video here (You gotta see this!)
"Cuba used to have mansions and a relatively decent economy. They moved from the individual to the collective. Now they're drivin' '54 Chevys. Maybe the last great car to come out of Detroit."(...)
"They're [floor traders on the Chicago Mercantile Exchange] pretty much of the notion that you can't buy your way to prosperity. And if the multiplier that all of these Washington economists are selling us is over one then we never have to worry about the economy again. The government should spend a trillion dollars an hour because we'll get 1.5 trillion back.
(...)
"If you read our founding fathers, people like Benjamin Franklin and Jefferson, what we're doing in this country now are just making them roll over in their graves."
The division is not over race, as AG Holder claimed, but over productivity. The "racism" charge is now merely a distraction. The new administration has contempt for anyone who can earn his own living through industriousness and productive effort. Instead they confiscate wealth from producers and lavish handouts upon the lazy and the corrupt. They are, in the truest sense of the term, looters. And they control the levers of power in the administrative branch of our government. We're about to see if the "separation of powers" model can withstand their assault on the Constitution.
Here's another smackdown worth looking at.
Posted by: T. Greer at February 21, 2009 12:52 AMGood one, tg. And by good I mean, of course, very bad. I love the line "...the Ebenezer Scrooge - Rick Santelli plan where we just let these people rot."
I think Chris Matthews is proof that the media rots your mind far worse than politics. He worked with Tip O'Neill and the leading lights of the Democratic party his whole life and came out well-reasoned, polite and practical. Ten years on MSNBC and he became a raving, frothing, hyper-partisan lunatic.
Sorry for the strong words but I'll stand by the comparison. A politician or advisor has to deal with opposition. Once you get your own show you are the law.
Posted by: jk at February 21, 2009 11:48 AMI love this guy. I have spent the last hour viewing youtube clips of the man, and I really think somone needs to make a Sentelli youtube channel.
Here are my favorites:
*Santelli Reams Liesman for Defending Bernake
*Rick Santelli on Market Intervension
*Santelli pissed off about the bailout
And yes, Chris Matthews is ridiculous. But honestly speaking, I think Santelli was the one who came off better there. For one, he never had to resort to asking who the other guy voted for.
Posted by: T. Greer at February 21, 2009 8:29 PMFebruary 3, 2009
Jockstrap
January 27, 2009
It's a Harvard-Yale Smackdown!
Words failed me when I read Yale's Robert Schiller's guest editorial in the WSJ this morning. Schiller is taking the Bidenesque position that the most important thing about the stimulus is its ginormousness.
So what must we do to revive our animal spirits and economic growth? We must be certain that programs to solve the current financial and economic crisis are large enough, and targeted broadly enough, to impact public confidence. Not only do we need a fiscal stimulus significantly greater than the proposal that is currently on the table, government action is also needed to take the place of the credit markets that seemingly worked so well when animal spirits were high.
I bristle at the notion of encouraging our illustrious legislative branch to make sure they spend enough. And I was going to write a serious, witty and trenchant reply. Thankfully for all concerned, Professor N. Gregory Mankiw (from Team Hahvaad) did it for me:
I think a lot of economists would agree with that. The question is what it would take to make people more confident. Bob thinks that confidence would rise if the government borrowed more and spent more. Other economists think that confidence would rise if the government committed itself to, say, lower taxes on capital income. The sad truth is that we economists don't know very much about what drives the animal spirits of economic participants. Until we figure it out, it is best to be suspicious of any policy whose benefits are supposed to work through the amorphous channel of "confidence."
This is where Ayn Rand trumps all these morons, particularly Keynes. If you want to call it confidence, fine, call it that. But don't call it anything related to "animals."
"You keep using that word. I do not think it means what you think it does." People throw out nice-sounding words but rarely stop to think about what they're really saying.
Keynes' term is a complete misnomer because "animals" use instinct and similar non-thinking passions as the basis for their actions. Man is not an animal. Man is a thinking, reasoning being that weighs decisions on the basis of trade-offs (i.e. what is to be gained). A decision may be made quickly or "spontaneously," but that hardly means the decision was not rational. (Side note: here I speak of "man" in a general sense. There are plenty of people who act little better than animals.)
I don't want people's "animal instincts" to come out or otherwise encouraged in any way. Animals' instincts are to do whatever seems right at the time, with no rational judgement, even if it means killing their own young. Do lions worry about being confident about pursuing prey? Do deer similarly worry about finding vegetation? Hardly. Animals merely do, so using the term "animal spirits" to mean confidence is completely absurd.
Contrary to what Shiller asserts, to "trust" isn't to act like an animal -- in fact, it's exactly the opposite. Animals have no sense of "trust" because their nature has no doubt to suspend. On the other hand, when humans "trust," it actually is not dismissing any fear or hesitation, but in fact making a rational judgment based on information.
What happened with the current crisis, and I'll get to this in a subsequent paragraph, is that the government created an artificial sense of "trust" in housing and other markets. People were not suspending any doubt, because government made things look better than they actually were. Shiller is correct to point out specific things like the collateralization of mortgage-backed securities, but he misses the big picture that government was the problem in everything that happened. It wasn't the case that "confidence was blind," but that people believed they saw more than they actually was. This is not mere semantics; the logical distinction is important. People were led to believe there was more reason to be confident than not confident when the former didn't really exist, not that they turned a blind eye.
Furthermore, these economists who want to promote "confidence" typically don't understand a simple point: why do we want people to have confidence when it's not necessarily warranted? Note that politicians, and most economists too, aren't even talking about making certain people more confident in a certain industry. They're talking about increasing confidence in general, but confidence for its own sake is a bad idea. Just one of many examples: I don't want banks loaning out tons of money just because, just one of many reasons TARP is a bad idea. There are plenty of would-be borrowers who don't deserve the least bit of confidence insofar as repaying the debt. It was home ownership for home ownership's sake that helped fuel the housing bubble, followed by the Fed injecting hundreds of billions of new dollars into the global economy -- liquidity for liquidity's sake.
Now, I'm on record as saying the crisis is one of confidence, not liquidity (there's plenty of the latter). But that doesn't mean we should do things to make people more confident, which is to effect confidence for its own sake. We should let market processes work on their own, unfettered by government, so that people can compete and be worthy of confidence. If people are generally not confident about something, there's a damn good reason: their information tells them not to be. There may have proper information showing its a bad company, they may not yet have enough information to be confident (but could in the future), or government skews information so that people can't make rational decisions. The third happens all the time, but so badly today that it's the direct cause of this crisis.
The one thing few people point out is that government has a monopoly on confidence. You can mistrust it, but in most cases it ultimately gets its way.
Posted by: Perry Eidelbus at January 27, 2009 3:59 PMWell said. Just because risk is a valuable part of wealth creation doesn't mean it should be subsidized. A free market should deliver plenty of opportunity for every risk appetite.
Posted by: jk at January 27, 2009 4:08 PMJanuary 23, 2009
Review Corner
Dusted off an oldie-but-goodie thanks to Netflix: Commanding Heights.
I watched the first (Keynes vs. Hayek) disc last night and one is astonished to realize this was broadcast on PBS and funded in part by the Pew Trusts and CPB. I bet several thought police lost their jobs over that. (FedEx is listed first, I think Fred Smith may have ponied some dough.)
As enjoyable as it is, it is bittersweet to watch it and think "freedom was winning -- just a few years ago." We seem poised to give all the gains away and return to government controlled economy.
Great, great stuff. If you missed it drop everything and watch it (I think it's available free on pbs.org). If you have, it is a very good time to watch it again. Right before we give the Commanding Heights back to the planners.
Two notes: Firstly, the evil collectivists at Google include Keynes in the spellchecker but not Hayek. Need I say more? Secondly, like reading The Everyday Economist, it reminds that Lord Keynes was not a devil. He was a brilliant figure who gave us much of the science of Economics. He was on the correct side of concern with the Versailles Pact and did not live long enough to really grasp the post-war economies. I'll still take Friedrich August any day of the week, mind you, but Keynes deserves his props.
We watched parts 1 and 3 in our World Affairs class last year. Colored me impressed- it certainly is the best introduction to international economics I have seen on the screen. (Apparently it is based off a book? Anybody read it?)
~T. Greer
January 20, 2009
That 70's Show
Yet another bad idea from the past gets dusted off as the economy contracts. A good friend of the blog sends a link to an article discussing the return of the"Buy American" movement in Michigan.
"If people continue to buy foreign cars, this won't be America for long."'Out of a Job Yet? Keep buying foreign!' Ford production workers Tony Saputo, left, of Macomb Township and Brian Pannebecker of Shelby Township hold bumper-sticker magnets that Saputo created to discourage foreign car purchases. They sell for $3 at labor rallies.
The Free Press article makes a valiant (I once owned a Valiant...) effort to at least address the complexity of globalization, noting that Toyota and Nissan operate design centers and battery plants in Detroit. Author John Gallagher is balanced and concludes that most people are fixed in their buying habits and preferences.
But it is disturbing that these ideas are gaining currency. The big three made some money between '78 and '08 by building what people wanted (even though they were often evil SUVs) these appeals are economically stupid and are bound to have less appeal today after successful integration of global products, US manufactured Toyotas Hondas and Subarus, and the unpopularity of the automotive bailout.
If people keep buying Belgian chocolate, this won't be America for very long.
If people keep buying Swiss watches, this won't be America for very long.
If people keep buying Austrialian beef, this won't be America for very long.
If people keep buying Philippine pineapples, this won't be America for very long.
If people keep buying Latin American textile goods, this won't be America for very long.
This isn't reductio ad absurdum. It's applying a very basic principle -- namely that any trade, within or beyond borders, allows an economy to specialize and flourish, while protectionism is in fact what destroys economy -- to a specious argument. American automakers are as competitive as horse breeders and buggy makers became a century ago, and they want "help" like certain French industries a century and a half ago:
"You must give me work, and, what is more, lucrative work. I have foolishly chosen an industry that leaves me with a loss of ten per cent. If you slap a tax of twenty francs on my fellow citizens and excuse me from paying it, my loss will be converted into a profit. Now, profit is a right; you owe it to me."
The society that listens to this sophist, that will levy taxes on itself to satisfy him, that does not perceive that the loss wiped out in one industry is no less a loss because others are forced to shoulder it—this society, I say, deserves the burden placed upon it.
Posted by: Perry Eidelbus at January 20, 2009 12:58 PMJanuary 16, 2009
Sweatshops
An unexpectedly keen view from Nicholas Kristof in the NYTimes. He suggests if you are raising a child in a Cambodian garbage dump, a job in a "sweatshop" does not look so bad.
I’m glad that many Americans are repulsed by the idea of importing products made by barely paid, barely legal workers in dangerous factories. Yet sweatshops are only a symptom of poverty, not a cause, and banning them closes off one route out of poverty. At a time of tremendous economic distress and protectionist pressures, there’s a special danger that tighter labor standards will be used as an excuse to curb trade.When I defend sweatshops, people always ask me: But would you want to work in a sweatshop? No, of course not. But I would want even less to pull a rickshaw. In the hierarchy of jobs in poor countries, sweltering at a sewing machine isn’t the bottom.
Well said. The whole piece is superb.
Hat-tip: Terri
Who stole Nicholas' computer and what did they do with him??
Posted by: Boulder Refugee at January 16, 2009 7:54 PMNo kidding. I checked the name a couple of times.
Posted by: jk at January 16, 2009 8:21 PMJanuary 15, 2009
Other Than Avoiding Armageddon
Blog friend Josh Hendrickson at the Everyday Economist links to "The Terrible Lessons of TARP" by Barry Ritholtz. Ritholtz is a bright guy and frequent Kudlow & Co. guest. I always considered him the anti-Kudlow. It's surprising they can be on the same show and not disturb the space-time continuum.
Though I tend to fall on the Kudlow side of things, Ritholtz is a serious and smart guy. To provide both sides on CNBC, they always pull up cartoonish bears and leftist political hacks to balance Larry's optimism and general support of the GOP. Ritholtz is neither, but he trends a little bear-ish and has a healthy distrust of politicians of any stripe.
Props complete, but I must disagree with his reasonable and eloquent arguments against TARP. I'll agree with each of his points but he betrays himself in the intro:
What I can say without reservation is that the TARP spending prevented large brokers and banks from going to zero. Since the legislation was passed in the Fall, there has not been a major disruptive bankruptcy.Sure, the FDIC had to take over a few institutions that were overdue for the long dirt nap anyway, but the sort of market roiling Bear Steans collapse, and the subsequent Q3 Lehman/AIG/CitiGroup disasters have at least stopped.
This is not, to be clear, any declaration that the TARP has been a success. We have avoided financial armageddon, but other than that, it has been an abject failure.
Other than that? Other than doing exactly what it was supposed to do, it was an abject failure.
I certainly suggest you read the whole thing. Again, all his points are correct -- it was ad hoc, capricious and wasteful. Fair cop, guv! Other than avoiding financial Armageddon...
jk,
The fact that we haven't had any banks fail is not evidence that this has been a success. As Perry loves to say, correlation is not causation.
In order to prove that the TARP is the reason for the lack of failures, you must be able to answer the following:
1. Where did the money go?
2. How has it been used?
3. What would have happened had it not been used?
Admittedly, number 3 is a counter-factual and therefore an answer would only be mere speculation. Nonetheless, I think that you would find it particularly difficult to answer numbers 1 and 2 and without which it is hard to make a case that it has been successful.
Posted by: Everyday Economist at January 15, 2009 10:28 PMI love the ThreeSources commentariat and respect their right as free thinkers in a free market to comment or demur whenever they choose.
But I got zero responses to my post (four south of this one) with a graph of the TED spread. I have made the same case since TARP (using LIBOR, which has the same shape). The point of TARP was to keep credit markets from freezing up like our friend T. Greer in Minnesota.
I cannot (like the old software joke) roll back time and see what would have happened if Secretary Paulson had decided to get a massage and eat some high-fiber cereal instead of intervene. But LIBOR went to an acceptable level and my credit card works in the local ATM. I suspect Alexander Hamilton is smiling down on us even if Jackson and Taney are cursing.
Posted by: jk at January 16, 2009 11:19 AMjk: as my friend Billy Beck says, principles are all that matters. Not blind clinging to an opinion or ideology, but a position borne of reason and care.
Throw out everything else and ask the moral question: why should anyone be coerced, via taxation, to support these companies that should properly be allowed to fail? The ends do not justify the means -- rather, the ends are justified by the means. How you proceed along the journey is at least as important as the destination.
EE is exactly right on the three questions. And to show how ludicrous TARP has become, we don't even know the answers to #1 and #2. So much for government transparency and accountability!
Do you realize that your ATM card would very probably would have anyway, in a parallel universe where TARP didn't pass? You've swallowed the same sort of rubbish that people still accept about FDR's New Deal: "Yes things were still bad, but they'd have been worse if he hadn't acted!" Remember that whatever the government is "injecting," that's our money. The government isn't rescuing us: it's making you rescue yourself. And when it can't tap us for the money now, it borrows it, so we'll probably have paid double the principal amount by the time the debt is retired, because of interest.
You're asking and trusting the arsonist to put out the fire he started. No thanks! The arsonist is hardly "all we've got" -- we have the free market to carry us through.
Posted by: Perry Eidelbus at January 16, 2009 11:47 AMjk,
2. As I have said before, this was never a problem of liquidity, but rather counter-party risk (see here and here). This suggests that the best form of action is to let/facilitate the bankruptcies of the failing firms. What we have done with the TARP is exactly the opposite. We are continually funneling money to the failing companies to keep them afloat.
3. What is the evidence that the TARP is what caused the TED spread and the LIBOR to come down? They are, by the way, still at historically high levels.
Posted by: Everyday Economist at January 16, 2009 9:45 PMI was actually going to use that to my advantage. The original TARP proposal (we call it Tarp Classic® now) was more about counter-party risk than liquidity.
I suggest that LIBOR and TED spreads measure counter-party risk and that the realization that the US Treasury was "backstopping" some of the toxic assets mattered more than the exact vehicle or procedures. I would not have changed TARP Classic® to New TARP with extra liquidity. But then, they don't let me be SecTreas.
Yes they're still high but North of 800 bps is untenable -- that's ATM and credit card doesn't work territory.
jk,
I am trying to follow you here, but you are losing me. You are correct that the particular credit spreads measure counter-party risk. You are also correct that the TARP classic was aimed at reducing such risk. Finally, you correctly assert that the actual TARP just injected capital directly into the banks and was thus aimed at adding extra liquidity.
So how is it that a TARP aimed at increasing liquidity lowered credit spreads?
I assume that your comment amount backstopping is your evidence. However, if you look at the LIBOR-OIS spread, you will notice that after hovering between 50 and 100 basis points, it rose to nearly 400 basis points shortly after the announcement of the TARP.
Posted by: Everyday Economist at January 19, 2009 11:09 PMJanuary 14, 2009
TED's Excellent Adventure
That headline is so lame and obvious, I apologize. But I surprisingly have not seen it.
As I am the last guy left defending President Bush (I'll shut off the lights when I leave...) I am also the last guy with a nice word for TARP, or as it is known around here, "the unconscionable bailout of greedy wall street bastards." You can talk about moral hazard and find me sympathetic, you can go all Senator Durban on me and complain about lack of oversight -- it's a fair cop.
I have but one defense:
Hat-tip: Professor Mankiw who adds "Bloomberg reports that the Ted spread is now below 100 basis points. The Ted spread, the difference between the interest rates on interbank loans and T-bills, is one gauge of how much fear is gripping the financial system. Its decline suggests that the TARP is working and is certainly good news."
January 13, 2009
Freedom Still Works
The Wall Street Journal's annual "Index of Economic Freedom," compiled with the Heritage Foundation is out this week. It provides a stark reminder -- contra Arianna Huffington -- that free market capitalism is not dead.
The positive correlation between economic freedom and national income is confirmed yet again by this year's data. The freest countries enjoy per capita incomes over 10 times higher than those in countries ranked as "repressed." This year, for the first time, the Index also correlates economic freedom with important societal values like poverty reduction, human development, political freedom and environmental protection. The linkages are robust, with economically freer countries performing significantly better on every indicator of well-being.
Click through to see the whole list, but the top 10: Hong Kong, Singapore, Ireland, Australia, New Zealand, United States, Canada, Denmark, Switzerland, and the United Kingdom are rewarded pretty handsomely with per-capita GDP in exchange for the freedom they offer.
The bottom of the list is at least as illustrative: North Korea, Zimbabwe, Cuba, Burma. Eritrea, Venezuela, Congo, Comoros, Libya. In the write up, Terry Miller wonders if we want to trade our principles for Cuba's after a couple of bad quarters, or if we should "dance with the one that brung ya:"
[former Texas Longhorn coach Darrell] Royal meant that even when faced with daunting new challenges, one would be well advised not to abandon a winning formula that had already brought success. That is good advice as the United States and other economies face the daunting task of restoring economic growth.The "party" in this case is the six decades of increasing prosperity that the world has enjoyed since the end of World War II. U.S. Gross Domestic Product was about $1.6 trillion in 1947 (valued in 2000 dollars), a little over $11,000 for every man, woman and child. In 2007, it was $11.5 trillion, or about $38,000 per capita. That's almost a doubling of average incomes each generation, made possible by the free market's efficiency in allocating capital and labor.
January 10, 2009
Economic Stimulus Plan
I have a dream - that America's political economy will return to something akin to the late 19th century. Referring to the causes of the latest economic crisis, Yaron Brook and Don Watkins of the Ayn Rand Institute write in their editorial 'Stop Blaming Capitalism for Government Failures:'
None of this is consistent with capitalism. As the economic system that fully recognizes and protects individual rights, including the right to private property, capitalism means, in Ayn Rand’s words, “the abolition of any and all forms of government intervention in production and trade, the separation of State and Economics, in the same way and for the same reasons as the separation of Church and State.” Laissez-faire means laissez-faire: no welfare state entitlements, no Federal Reserve monetary manipulation, no regulatory bullying, no controls, no government interference in the economy. The government’s job under capitalism is single but crucial: to protect individual rights from violation by force or fraud.America came closest to this system in the latter half of the nineteenth century. The result was an unprecedented explosion of wealth creation and consequent rise in the standard of living.
JK, like the respected Denver radio host Mike Rosen, constantly reminds us to practice the "politics of the possible." But why should it be impossible for a majority of voters to recognize that the big government policies Obama and company may enact just made the problem worse - and they will - and abandon him in droves for the 2012 GOP candidate? This is the "new Reagan" scenario that many have written about. But for this to happen there needs to be a GOP candidate who understands the capitalist ideal before he jumps into the hog wallow to compromise with collectivists. John McCain and George Bush (both of them) despite all their admirable traits, were not that candidate.
Wow, this Rosen fellow sounds very intelligent...
I share your enthusiasm for the economic policies between the Civil War and the Progressive Era. It was certainly tainted by Jim Crow but I find it easy to call them unrelated. Hayes was the right pick in 1876 and if Tilden had not forced the Compromise of '77 we could have had economic liberty and continued the Reconstruction.
Gene Healy points out that while we had the string of non-descript, "non-heroic" presidencies between Grant & McKinley, we surpassed Great Britain as an economic power.
On the Pragmatism side, jg, put me in with Rosen (I have not heard his show but I've read some of his newspaper columns and heard great reviews from my brother-in-law). I challenge you to look at a group with minimal selection bias and tell me that a majority would agree that welfare and social security should be terminated. I think you'll find it more matches Pew's famous nine-percent. (Again, no fair polling at the Objectivists of Weld County quarterly bake sale and skeet tourney.)
I could not disabuse a right-leaning relative yesterday of the belief that the USDA is only reason the big grocery stores don't sell rancid meat. I can't think of a group of workmates, family, musicians, or friends in which a majority prefers less government "safety-net" security.
I enjoyed the Brook-Watkins piece very much, and I'd be inclined to support a candidate who voiced such beliefs. But I'd be among the few. Rep Ron Paul was able to augment his libertarian followers with a good number of the rabid anti-war left. And he still lost. By a lot.
It's hard for you and me to believe and accept that our zeal for liberty does not enjoy an electoral majority, but it does not. You can write editorials for the Ayn Rand Institute and link and discuss them on ThreeSources. But you'll be a spectator at the next contest between the next McCain and the next Obama.
... welfare and Social Security TERMINATED? JK, you are such a tease. Even I don't dream such things are possible in a single bound.
The idea I tried to explain, perhaps too obliquely, is that the 'ideal' of pure capitalism leads to unprecedented prosperity. Any baby steps in the direction toward more capitalism will make things better for all Americans.
As for the popularity of such market oriented changes to welfare and Social Security, even President Clinton had to sign the GOP bill that reformed the former ... and reforming the latter could be equally popular with the right plan. Perhaps as government operated private accounts with gains earned in private equity markets yet federally guaranteed never to decline in value?
If we're going to talk about bailouts anyway then lets consider one that actually provides some real personal financial security. (Tomorrow I'll deny I ever wrote this.)
Posted by: johngalt at January 13, 2009 3:11 PMBut-but-but-but-but-but-but-- you are making the pragmatists' case. I want to fight at the margins and get "as close as we can" to capitalism. For this I seem to be frequently derided as lesser-of-two-evilsism.
I was pulling my absolutism from your excerpt "Laissez-faire means laissez-faire: no welfare state entitlements, no Federal Reserve monetary manipulation, no regulatory bullying, no controls, no government interference in the economy" and from your reference to 19th Century pre-progressive, pre-New Deal policies.
A government risk subsidy is not a bad idea if you could make the right kind of trade. Who is this guy and what has he done to Brother Johngalt?
Posted by: jk at January 13, 2009 4:32 PMJanuary 5, 2009
Protectionism Works Great in a Downturn
The idea that we learned any lessons from the 1930s shows zero empirical proof. I guess tight money is not too likely, but the new administration is ready to bring back the WPA and Smoot-Hawley. Reuters:
WASHINGTON, Jan 2 (Reuters) - Both President-elect Barack Obama and Vice President-elect Joe Biden will huddle with Democratic and Republican congressional leaders on Monday to try to advance a huge economic stimulus bill that Obama hopes can be enacted quickly, despite Republican reservations.Obama's transition team said it is mulling "buy American" provisions for the stimulus package that could favor U.S. companies over foreign competitors.
Bottled water and ammunition, kids. Bottled water and ammunition.
Hat-tip: Professor Makiw
Einstein's reputed definition of insanity...
Posted by: Perry Eidelbus at January 5, 2009 1:44 PMI think it was actually Benjamin Franklin who said, "The definition of insanity is doing the same thing over and over and expecting different results."
Posted by: Boulder Refugee at January 5, 2009 2:36 PMMany modern sayings are falsely attributed to various historical figures, hence why I said "reputed" when invoking Einstein. I've never heard this quote attributed to Franklin, who's credited with but didn't actually say or write, "Democracy is two wolves and a lamb deciding on lunch. Liberty is a well-armed lamb contesting the vote!" That particular one always pisses me off, and I've even called onto the carpet a certain Pepperdine prof who should have known better. In the end, he admitted he didn't really know where it came from.
Posted by: Perry Eidelbus at January 7, 2009 4:01 PMWhen in doubt, always attribute Mark Twain or Samuel Johnson.
My favorite on this is "If you're not a liberal when you;re 20, you have no heart; if you're not a conservative when you're 50 you have no brain." I've seen that attributed to several, as early as William Blake.
Posted by: jk at January 7, 2009 5:44 PMDecember 29, 2008
The Spirit of Bailouts Past
Tyler Cohen makes a good case that the 1998 "Bailout" of Long-Term Capital was both a bad precedent and sowed seeds of moral hazard in the very companies we had to bail out a decade later.
At the time, it may have seemed that regulators did the right thing. The bailout did not require upfront money from the government, and the world avoided an even bigger financial crisis. Today, however, that ad hoc intervention by the government no longer looks so wise. With the Long-Term Capital bailout as a precedent, creditors came to believe that their loans to unsound financial institutions would be made good by the Fed — as long as the collapse of those institutions would threaten the global credit system. Bolstered by this sense of security, bad loans mushroomed.
I don't know that I am completely convinced, but it is a solid case and a solid cause for concern. If that blossomed into this, than shall this become -- ooh, I don't like to think of it!
Hat-tip: Professor Mankiw, who is gaining converts to his bleedin' Pigou Club all the time...
December 24, 2008
Economic Theory and Bailouts
ThreeSources friend Josh Hendrickson (the Everyday Economist) has an excellent column in TCSDaily on "What macroenomic theory has to say about the financial crisis."
The work of Robert Barro, Charles Plosser and John Long as well as Nobel laureates such as Milton Friedman, Franco Modigliani, Finn Kydland, and Ed Prescott have much to say about the impact of macroeconomic policy.Unfortunately, with a few notable exceptions, the work of these economists has received scant attention during the current crisis. Nonetheless, their work remains important in explaining the futility of much of the current policy prescriptions. Equally disturbing is the return of self-professed Keynesians with policy prescriptions that are wholly inconsistent with both Keynes and modern macroeconomic theory.
He explains several theories that speak to expected efficacy of stimulus plans. If there's a common thread, it's that none of them predicts much success for the proposals under consideration.
Oh well, Merry Christmas!
December 20, 2008
Automotive History
Megan McArdle offers a comprehensive description of TheBigThree's troubles, and some dark predictions for their future outlook. In addition to the familiar oligopoly story, there are quite a few new details that I had not considered: the function of the dealers, the incentive structure during the oligopoly days, and the double-edged sword of profitable financing divisions:
But perhaps more importantly, Detroit turned from making money on cars to making money on financing. Detroit didn't make a big profit by selling you a Ford Taurus. It made money on financing your Ford Taurus; often, the car was sold at a loss in order to get the finance business. The Big Three were banks manufacturing cars as a loss leader.That's why they could afford to pay their workers above market wages. They were not trying to make a profit on the manufacturing process. The UAW wages and benefits were not compatible with profitability in the auto business five years ago. Or ten years ago. Or fifteen years ago. The UAW is not being asked to bear the pain of returning the company to profitability in a tough market. The UAW is being asked to get their wages back to where they would have been in the first place if they hadn't been subsidized by the now-unprofitable financing arms. Detroit has spent decades buying labor peace with increasingly desperate ploys that have finally run aground.
Good stuff! Hat-tip: Instapundit
December 19, 2008
Can We Call Him a Denier?
All Hail Professor Mankiw! He links to an AP report claiming "Only one outside economist contacted by Obama aides, Harvard's Greg Mankiw, who served on President Bush's Council of Economic Advisers, voiced skepticism about the need for an economic stimulus, transition officials said."
Clearly the Economics is settled and Mankiw is just some flat-earther from the Bush administration! They probably just asked the old man to be nice. Mankiw points out:
Skepticism, rather than unequivocal opposition, is the right word. When contacted, I said the same things I have been saying on this blog: that monetary policy is not out of ammunition, and that tax cuts are potentially more potent than spending increases. I could have added that a spending-based stimulus to address the current short-term crisis might lead to a long-term increase in the size of government, but I doubted that concern would sway Team Obama. In general, I think economists need a large dose of humility when evaluating alternative proposals to deal with the current downturn, as there is still a lot we do not understand.I am sure I am not the only person in the economics profession skeptical of spending increases to stimulate the economy. See, for example, GMU economist Tyler Cowen. If the new administration wanted to find more skeptics of stimulus spending among professional economists, I could have come up with some possible candidates for them, but the Obama economists probably already know who those likely skeptics would be.
Nixon was wrong. We're not all Keynesians now. He should have said "We're all Keynesians except for N. Gregory Mankiw." Thank all that is good and decent in the world that there is one.
December 17, 2008
Bernanke-san?
I have split with my mentors at the WSJ Ed Page twice this week -- and it's only Wednesday!
The hard money crowd is understandably not happy with a Fed Funds rate less than 25 bps. The title of the lead editorial this morning is "Bernanke Goes All In."
If the current Fed believes there are limits to monetary policy, you can't tell from yesterday's Open Market Committee statement. The 10 members voted unanimously to take its target fed funds rate down to between 0% to 0.25%, from 1%. With Treasury bills already trading at close to zero as the world flees toward safe investments, the practical impact of this rate cut is negligible.
Many have recalled 1990s Japan with its Zero interest rate and government infrastructure projects, and this is certainly worth fearing. Nor is comforting that the Obama Team is reading books about FDR's first 100 days (and none, I expect, will read Amity Shlaes's The Forgotten Man).
But I'm onboard with the FOMC based on something Don Luskin said the other day. (YouTube on his site). By having a 1% rate, the Fed basically offers a safe overnight rate on cash that banks cannot get anywhere else. What planet have I landed on that considers a 1% riskless rate as being market-distortingly high? But there it is.
So the lower rate won't necessarily create liquidity but it will keep the Fed from mopping up the liquidity that is out there. Sounds right to me, and I can hardly see the inflation ramifications of 1% vs. 0 - .25%
Crazy days, kids. Crazy days.
December 15, 2008
We're Way Beyond Moral Hazard, Boys
We've had a rare, united front against the automotive bailout around here. Imagine my surprise to see Don Luskin (video at the link) on Kudlow saying to let it roll.
I don't think the ghost of Senator Stabenow visited him and changed his mind, but he makes a few reasonable points. First that the amount of money is "a rounding error in a Farm bill;" next that the continuation of "an orderly unwinding of manufacturing jobs" would be well received by the equities markets who would find it difficult to weather another shock; and the line I stole for the title "we're way beyond moral hazard, boys." whether we will commit an additional $16 Billion after AIG, Citi, and TARP is not worth the distraction.
You don't have to like any of those points, but they are all hard to refute.
December 14, 2008
Opposing Auto Bailouts == Slavery
A very good friend of this blog trolls the fever swamps of the mad Internet left so you and I don't have to. He feeds me a good stream but I must agree that this one is top drawer. Ron Dzwonkowski of the Detroit Free Press editorial page sees the last battle of the War Between the States -- in the US Senate:
It just grinds you, doesn't it?I mean that a handful of senators from former Confederate states could so summarily sign a death warrant for the Michigan economy. A bunch of self-serving Republicans who will now go around blaming the United Auto Workers for killing the auto industry rescue plan.
[...]
Certainly this defeat was payback for the UAW's traditional support of Democratic candidates. But maybe it ran even deeper, back to 1861 when President Abraham Lincoln exclaimed "Thank God for Michigan!" as 798 men from this state arrived in Washington to defend it against advancing southern troops early in the Civil War.Thursday's Senate session gave this southern cabal a chance at long last to say, "To hell with Michigan!"
Dzwonkowski closes by quoting of the Senate's leading economic and intellectual lights (cough, cough!) Sen. Debbie Stabenow. She compares the financial rescue to the auto bailout and decides: "They always focus on the supply side. We're on the demand side. They say help the people at the top, and it will trickle down. But it never does."
And I didn't even excerpt how it is "sort of, you know, un-American" to decide "wages paid by the imports ought to be the industry standard." And how the UAW wages are just the last issue they can cling to after Congress has worked everything else out.
UPDATE: Megan McArdle, whom, out of deference to Perry, I will present with no adjectives, has a better take. If the UAW thinks they have fixed the problems by agreeing to reductions in 2011 "Fine, let them have the money in 2011."
This seems so elementary to me that I cannot even believe we are arguing about it: the reason Gettlefinger needs to take a haircut along with everyone else, is that if he doesn't take a haircut, GM will be back in 6 months asking for more money. There is absolutely no way whatsoever that GM has any hope of profitably making a car with labor costs higher than their competitors. Their labor costs should be lower than their competitors, because they have to sell their cars at a steep discount. Even if we somehow magically revolutionize the management tomorrow and get them steep discounts on their debt, it is going to take them years to rebuild their brand to the point where they can charge comparable prices to Japanese cars. GM cannot afford to pay its workers more than the competition in that situation.
UPDATE II: The Everyday Economist finds -- and refutes -- another overwrought column, this time from Mitch Album.
December 8, 2008
Dude, Where's My Recession?
The Everyday Economist links to a solution to the "recession conundrum." We are told by politicians, news media, and now the NBER that we are in a recession. Yet the GDP numbers don't seem to want to cooperate. Casey Mulligan posits a credible explanation:
You may have noted the contrast between this year’s employment performance and GDP performance. When productivity grows, output can grow even while employment falls. We are in a recession (and have been since late 2007) by the employment definition (NBER uses this) but not yet by the GDP growth definition. We likely will finish 2008 with more GDP than in any year in history, yet less employment than in 2007. The GDP and productivity performance is quite different from “severe recessions.” What is severe about the 2008 economy is the news coverage, and the assault on the taxpayer!
So, it's one of those expanding-contracting economies izzit? I don't make light of 500K+ of job losses, and I am emotionally incapable of laughing at my 401(k) balance. Yet, like several bloggers, I cannot help but notice huge crowds at stores and mall parking lots. I read how disappointed they were with 3% YoY sales growth. There seems a huge line between disappointing growth and contraction. Bad times, yeah, but the mall really doesn't look like Depression 2.0.
The Democrats and their media enablers have a vested interest in making sure that people believe this is the worst economy since 1929. This sets the bar so low, they hope, that even Obama can't trip on it.
Posted by: Boulder Refugee at December 8, 2008 12:20 PMMy father lived overseas for the better part of the 1960s, all of the 1970s and the early 1980s. He missed the anti-war violence, the stagflation, the high gas lines, and most of all, Jimmy Carter. He didn't repatriate until after the necessary '81-'82 recession as monetary policy stabilized, but he was still quite aware of the economic woes back home. He missed some of the worst economic years this country ever saw. To put it in perspective, we think it's bad now, but it was worse in the 1970s in NON-recessionary years, in terms of inflation and unemployment.
What he didn't miss was the Great Depression. As I've mentioned on my blog and maybe in comments here, he was 11 when the Crash of '29 occurred. Were he still alive today, he could personally assure all of you that this is nothing, NOTHING like the 1930s. When there are children who are selling fruit on street corners just to survive (not so they can buy the latest Wii game or a new PSP), when there are parents making moonshine (as my grandmother did) -- and because they can't do anything else, not because it's profitable -- then maybe we can say things are bad.
Last night I saw a commercial by those "Feed the Children" scammers, showing children who were saying their stomachs hurt, they feel sick, etc. They looked more scared than hungry, probably because they were threatened unless they looked suitably wretched. Now, you show me a child in that situation, and I'll show you a lazy parent. There are jobs out there, but a lot of these single mothers expect us to foot the bill for their teenage promiscuity, and because they expect to raise a family on a 40-hour work week.
We may have "the worst financial crisis since the Great Depression," but how well are our lives going on? Pretty goddamn good.
Posted by: Perry Eidelbus at December 9, 2008 2:51 PMDecember 2, 2008
I Thought It
I thought it, but Blog Friend Perry Eidlebus says it: "NBER are a bunch of lampshades who inhale air conditioners through their anuses."
If NBER can define a recession to mean whatever the hell they want, then I can also use words to mean whatever the hell I want. Remember that this is the same group that finally admitted in December 1992 that the recession had ended...in March 1991. They deliberately waited until after the election so Bubba could win on a "bad economy" platform, when the truth was that the economy was already recovering.There haven't been the two consecutive quarters of decreased GDP (the traditional definition of recession), but we might find out that the 4th quarter will fulfill that. NBER can't risk that, though. They need a recession under a Republican president, so that an incoming Democrat can take credit for "fixing the economy." So they're just changing the rules to fit their agenda.
Actually, my thought did not include air-conditioners...but it did seem somehow convenient to call the recession during Bush's term.
November 25, 2008
Like, Say, Shaq?
Blog friend Josh Hendrickson at Everyday Economist has an interesting post with a very smart take on the TARP program, which he has consistently opposed. I'd love to read the book by Roger Koppl which inspired the piece but 66 pounds is a little rich (at current exchange rates anyway).
The idea is that big players such as the US Treasury acting in a market without rational market goals will distort the markets and preclude clearance and price discovery.
The effect of this discretionary power is to increase uncertainty within the financial markets. Firms that receive capital infusions refuse to increase lending precisely because the rules are changing on a daily basis. The same goes for investors who must not only predict what the market is going to do, but also the behavior of the Big Players. Of course, the ability to predict what the Treasury and the Fed are going to do next is substantially difficult. The result is the herd-like behavior that has been prevalent in the stock market for the last few months. When there is a high level of uncertainty in markets, participants start relying more on what they believe that others believe than the prospective yield of a particular investment. The empirical evidence presented by Koppl and his colleagues confirms these claims. Uncertainty breeds uncertainty.
I've been the lonely voice around here for TARP. While I am not ready to capitulate and attack Paulson, this argument is pretty hard to contradict.
"Firms that receive capital infusions refuse to increase lending precisely because the rules are changing on a daily basis."
I'm glad to see someone else say it. Austrians like me have been saying this since the Bear Stearns fiasco -- after all, Austrian Business Cycle Theory is predicated on the idea that government intervention in markets introduces errors. Systematic errors, in fact, not just occasional misjudgments that free markets experience.
And ever since TARP was introduced, I and other Austrians have pointed out that it's not a crisis of liquidity (there's plenty of that), but a crisis of confidence. And TARP prevents credit markets from correcting themselves by further discouraging lending. It's bad enough when lenders are afraid a borrower will go under, but now there's a risk the feds will take over a borrower. Or, why lend your own money to someone, when you can wait for the feds to give you taxpayers' money to lend?
Posted by: Perry Eidelbus at November 25, 2008 12:58 PMNovember 19, 2008
Correcting The Refugee
The Refugee has ranted on these web pages to slam the gold-plated labor agreements as the root of Detroit's financial ills. However, in today's WSJ Louis Woodhill of the Club for Growth points to Congress's CAFE standards as the culprit:
It is difficult to overstate the damage that CAFE has done to GM over the years. The entire purpose of CAFE is to force companies like GM to do something other than build and sell the vehicles that would earn them the greatest profit . . . CAFE has bled GM of tens of billions of dollars in profits over the years. If they had all of those dollars in the bank today, they would not be on the brink of bankruptcy. CAFE forced GM to build millions of small cars and sell them at a loss. To make matters worse, CAFE made it illegal for GM to exploit its single most profitable brand, Cadillac.
While not backing off of his position regarding the untenable labor agreements, The Refugee stipulates that Mr. Woodhill's analysis is spot on. Don't expect to see any hearings on Congress's role in the whole episode, however.
The lead editorial today suggests that merely dropping the CAFE standards would keep them afloat. Allowing Chrysler to average foreign cars into its fleet ratings. But the Democrats will not trade their green bona fides for union jobs. Y'know if it weren't going to cost so much, this would be fun to watch!
Posted by: jk at November 19, 2008 12:59 PMAlso ignored are the insane dealer contracts. GM has three times the brands and five times the dealers of Toyota. All of these are state regulated and none will be broken without a Chapter 11 reorg.
Posted by: jk at November 19, 2008 1:01 PMYou bring up a very interesting point, JK: a trade-off between the green lobby and the union lobby. The only way the Democrats can satisfy both is using taxpayer dollars to subsized a broken business model. Oy, vay!
Posted by: Boulder Refugee at November 19, 2008 1:25 PMI don't see this as an either/or situation. To Hell with CAFE, and to Hell with the UAW. They both violate sound free-market capitalism principles. Scrap 'em both.
Unchain the ingenuity and the wealth-building capacity of America, and the world will see what we can do.
Posted by: Keith at November 19, 2008 4:02 PMUnion excesses - yes.
CAFE coercion of Big 3 fiduciary decisions - yes.
But while we're enumerating the real causes for supposed "market failure" in the auto industry let's not forget the artificial causes of inflated oil prices that compounded the car makers' troubles.
Whether or not environmentalist self-destruction is a communist plot to bring down the United States in a way that the USSR could not, it may well do so.
Posted by: johngalt at November 19, 2008 4:24 PMjohngalt: you're absolutely right, and we could talk for days about the causes of the oil prices. Thank you for boldly stating they are artificial.
I hope you'll agree the much-touted "credit crisis" is not so great a factor; the Big Three were in trouble long before the present "credit crisis."
As for your last line, I can't say for certain that the environmental movement is deliberately intending to destroy America (as we can now say the Vietnam-era "peace movement" was), but it is inarguably anti-Western, anti-market forces, and anti-rational. Accidentally or intentionally, as I love to say, the greens are all reds.
Posted by: Keith at November 19, 2008 8:59 PMNovember 17, 2008
Pigouvian Swine!
Professor Mankiw provides the best reason to oppose his beloved Pigou Club.
Each time the state of Alaska raised its alcoholic beverage tax, fewer deaths were caused by or related to alcohol, according to the study that examined 28 years of data.When Alaska raised its alcohol tax in 1983, deaths caused by or related to alcohol dropped 29 percent. A 2002 tax increase was followed by an 11 percent reduction, according to the study published in the American Journal of Public Health.
"Increasing alcohol taxes saves lives; that's the bottom line," said the study's lead author, Dr. Alexander Wagenaar, a professor at the University of Florida's Department of Epidemiology and Health Policy Research....
Give our illustrious legislators the green light for a carbon tax to enact public good, and then click on your stopwatches. It will be seconds before the tax code will be adjusted to punish liquor, trans fats, video games, with no end in sight.
Here in New York (in the city proper), trans fats were simply banned. But cigarette taxes have been massively hiked since Bloomberg took over from Giuliani.
Posted by: Perry Eidelbus at November 17, 2008 2:44 PMYes, so-called "sin" taxes are a bad idea. But a "carbon" tax isn't just a bad idea, it's the 21st century version of soviet-style economic planning. And depending on the size of the tax, it could reverse the prosperity gains of the industrial revolution.
Posted by: johngalt at November 18, 2008 10:58 AMNovember 15, 2008
Worldwide Economic Collapse
That's what the press and politicians are warning of, is it not? Johngalt's dad reassures that "as soon as Obama is inaugurated the press will emphasize positive news instead of negative and congress can then back away from the cliff and allow the market, as regulated and jerry-rigged as it is, to naturally adjust to conditions.
Meanwhile, in the pre-Obama interlude, world politicians still can't help themselves but try to "solve" the situation. Reports out of Washington this morning had me considering a "Brown 2012!" blog headline after Britain PM Gordon Brown's reported call for "a co-ordinated global tax cut to rescue the world economy from a devastating recession." Bully, said I. Then I read another description of his plan:
Britain Gordon Brown has a long list. To start with, he wants “co-ordinated fiscal stimulus packages” — which means getting countries to increase public spending to create new jobs and offer tax rebates to families. He wants the IMF to create a council of experts to monitor the markets for danger signs — his much-vaunted early-warning system — and the IMF’s coffers to be boosted by cash-rich states such as Saudi Arabia and China. He is also calling for a clean-up of the banking system, including a network of regulators to scrutinise the world’s biggest banks. [all emphases mine]
I'm not quite sure whether it's the press, PM Brown, or both who believes tax rebates = tax cuts. Probably both.
Well at least he said a few words against the auto bailout:
Mr Brown was already risking confrontation with the President-elect in barely coded criticism of a planned measure to bail out America’s ailing carmakers, a plan Mr Obama supports. “I do think it is really important that we send out a signal today that protectionism would be the road to ruin,” the Prime Minister said, in a speech to the Council of Foreign Relations in New York.“If we get into a situation where countries made decisions irrespective of what happened anywhere else, then we will see the same problems of other times. The dividing line here is between an open society capable of trading round the world, against a protectionist response that happened in the 1930s and is totally unacceptable.”
The EU said that it was ready to take action against the US at the World Trade Organisation if aid for the stricken US car industry was judged by the European Commission as illegal under international rules.
Thank NED that self-interest still rears its head somewhere in the world. John McCain apathy hasn't completely destroyed it.
As I've mentioned, I think the rescue plan was needed. I hear a lot of complaining about the AIG spa retreat, and I cannot excuse stupid and bad behavior from company executives. Like Adam Smith, I find it easy to love business and hate businesspeople.
But the decreases in LIBOR and TED spreads have borne it out. I suggested to someone yesterday that the risk spreads the week of the bailout were the equivalent of a 300/200 blood pressure -- you know the patient is going to die if you don't do something. The Paulson Plan will certainly be shown in time to be inefficient. Graft will be discovered and a large part of the effort (and largesse) will be proven to have been wasted. It is gub'mint.
But the BP is now 150/100. Give the economy some pills and come see Doctor Paulson in three months.
Remembering the second presidential debate, where TITANIC ignorance was displayed by both candidates, I will miss having a Prez who generally understands how the economy works.
Actually, LIBOR spreads are no more indicative of a "credit crunch" than the inverted yield indicated a recession when we weren't in one. As related as the two events may be, one may not trigger or indicate the other. If event A often happens with event B, that doesn't mean we can assume event A is happening just because we're currently observing event B.
The LIBOR-Treasury spreads show tremendous flight to safe U.S. government paper, and that lenders were demanding higher rates. It's likely that some lenders are the same who are putting the money into Treasury securities, but we cannot assume they're always the same people. We cannot and should not assume anything: we can only conclude the obvious, that there's less lending to the private sector and greater lending to government.
The problem, as I explained before, isn't a lack of liquidity. There was plenty of money to lend even before the Fed started pumping it in. It's confidence, and that's something government cannot inspire. It can only divert energies and resources, but not create. Paulson announcing the bailout may have decreased LIBOR-Treasury spreads, but he effectively made a single economic indicator the yardstick while stock indexes simultaneously tanked. They tanked because, as we Austrians put it, government action prevented rational decision-making. If there ever were, now is THE time for government to get the hell out and defer decisions to those with the knowledge.
You claim to be a Hayekian. So surely you understand that Paulson and his bureaucracy do not have all the information? Remember, they don't even know how much it will take, which is far simpler compared to how to spend it. They pulled the $700 billion figure out of the air, not because of estimation but because they wanted "a really big number," and now it's not enough.
Posted by: Perry Eidelbus at November 17, 2008 3:21 PMBut LIBOR spreads accurately measure perceived counter-party risk. I use them as a proxy for "the abyss" as in "Secretary Paulson stared into the abyss." The Everyday Economist says that the crisis was counter-party risk and not liquidity. I'll accept that but suggest it was ameliorated by increased liquidity and the suggestion of Treasury buying toxic paper.
I'd agree with you and Hayek that the actions are not going to be efficient but I ceded that in my comment. If half the money is wasted, I suggest that the other half can be considered a good buy if we avoid a global panic.
I'll also concede that I may be wrong here, unlike immigration where I am right and everyone else around here is dead wrong. Paulson took his shot with incomplete information and the early results show promise. To extend a true bailout to auto makers or retail or buggy whip manufacturers cannot be condoned. But the reflexive "no bailouts" issued from a high moral perch misses an actual government role as lender of last resort.
But LIBOR spreads accurately measure perceived counter-party risk.
Historically, yes, but not in the present time. As I said, inverted yields usually meant a recession, but ours was humming along. You can have an external factor that significantly moves one indicator but not the other: in this case, it was investors buying up an awful lot of Treasury securities, and massively depressing yields. This didn't affect LIBOR rates, because those investors were not always mortgage lenders.
I use them as a proxy for "the abyss" as in "Secretary Paulson stared into the abyss." The Everyday Economist says that the crisis was counter-party risk and not liquidity. I'll accept that but suggest it was ameliorated by increased liquidity and the suggestion of Treasury buying toxic paper.
Josh is talking about the same thing. I just happen to call it "confidence," and that's not something government can make better. What's $10 billion to a bank if it's afraid to lend it? And you can't blame a bank in this environment, when any bank might go under. It would be different if a lender were given the money, because then it wouldn't care if it got a return, but banks received the latest injections in exchange for a partial federal takeover.
I'd agree with you and Hayek that the actions are not going to be efficient but I ceded that in my comment. If half the money is wasted, I suggest that the other half can be considered a good buy if we avoid a global panic.
But most of the panic was in fact government-created. If things were simply left to sort themselves out, if banks were allowed to fail and be bought out, the Street would consider it regular business. However, here comes the federal government, with both parties calling this "the worst financial crisis since the Great Depression," MAKING it the crisis. Things wouldn't have been this bad if it weren't for federal meddling, from creating Fannie to legislatively blackmailing mortgage lenders to keeping interest rates too low.
Look what happened when Lehman's credit default swaps were auctioned: it all happened with no glitches, no panics. People sat down, made bids and accepted offers, and there was no reason for government to supervise or step in.
How do you know if 50% waste is a good buy? I wouldn't consider it so. Morally, why should I be forced to come along for the ride? Practically, you'd have to show me that if not for the bailout, I'll be part of a big loss that exceeds half of the bailout's value. You simply don't have that information. Nobody does. My firm is not being bailed out (nor are we asking), so the bailout wouldn't help me even if I were being laid off (knock on wood I haven't been yet). How about the 53,000 at Citi who are being laid off despite this bailout?
an actual government role as lender of last resort.
And how does the government accomplish this? By using force to take my money and give it to others against my consent. If I wanted Goldman Sachs, JP Morgan, Citi, et al, to have a portion of my money, I'm perfectly capable of buying their new stock issues myself.
Failure in free markets is not a bad thing. John Stossel recently quoted Walter Williams as saying that, because it's an important lesson in what didn't work -- a lesson just as important as successes. Check out what Boudreaux and Roberts have been saying on Cafe Hayek: the bigger a firm, in fact the more important it is to let it fail.
It's time to let a lot of banks and automakers go under, so that they'll reorganize or completely go under. Others can then pick up the pieces and use them more efficiently.
Posted by: Perry Eidelbus at November 18, 2008 2:08 PMYou've landed some solid blows, my friend; some of them will leave scars. But on my central point I remain unconvinced.
Yup, firms have to fail. I'm a Schumpeterian before I'm a Hayekian. No company is too big to fail and the government has zero role in keeping a private enterprise afloat against market forces. But the Paulson Plan was about keeping the markets afloat. Most of the individual firms fared very poorly. Okay, some guys from AIG had a grand day out. But the Wall Street that Rush Limbaugh worries was "bailed out" is gone. The funds were used -- correctly -- to keep the system working not individual firms. Paulson took on the role of JP Morgan in 1907.
I don't agree that "this time LIBOR didn't measure risk." It measures how much money a lender is willing to give up to avoid risk. If it's up 700 bps, I don't care if the lender is afraid of little green men, there is a problem if the financial market in aggregate is unwilling to trust other institutions.
I agree that government sowed the seeds of the panic with easy money, forced loans, goofy regulations and the like, but aside from Senator Schumer talking down IndyMac, I don't hold them responsible for the velocity of the unwind. It was a good ol' global panic.
We can argue whether the Fed or Treasury should have a role as lender of last resort, and I am pretty sympathetic to your case that they do not. Again, in this very real context, that role is expected and it would be foolhardy to discover antiHamiltonianism suddenly and unexpectedly.
Efficacy? Again, I cite the renormalization of LIBOR and TED spreads. Banks are confident enough of worldwide liquidity and (gasp!) government intrusion to feel they can make loans.
Fifty percent a good buy? The two days when the $700B package first did not pass, we lost $1.4T in market capitalization -- 50% of the rescue package is 25% of two days' losses. That does not "prove" my point, but it puts a scale on the discussion.
I cannot contradict your moral arguments, as I said, those will leave scars. Thoughtful opposition to interdiction on this scale is certainly to be respected. The less thoughtful cry of "No Bailouts" doesn't wow me. The original post said that I am comfortable supporting the Paulson Plan and opposing, vociferously, any bailout of the big three. You don't have to join me on both sides -- but there is a difference.
Posted by: jk at November 18, 2008 3:42 PMI'm a Schumpeterian before I'm a Hayekian.
There's no reason the two are mutually exclusive. They exist just fine in parallel and are often complementary.
No company is too big to fail and the government has zero role in keeping a private enterprise afloat against market forces. But the Paulson Plan was about keeping the markets afloat.
Actually, as I'll be be blogging about soon, it was more sinister than that.
But even if we take the "keeping markets afloat" at face value, what was it about? Forcing banks to lend, when market conditions dictated that they should hold on to their capital. It's certainly possible that a market of any size (from a person buying a Pepsi to an investment bank underwriting billions) will stagnate and even freeze when participants don't have enough information. Waiting for the dust to settle is particularly necessary after government meddling has introduced errors by encouraging one person beyond what was otherwise prudent, and discouraging another from what was otherwise innovative.
The bailout is no more than simple interference with normal market processes. As I've said, government cannot inspire confidence nor create goods and services. Its only power is in force, and the plain term for economic force is "redistribution." If government pushes one person, it does so only by pulling someone else -- hence the phrase "robbing Peter to pay Paul."
Most of the individual firms fared very poorly. Okay, some guys from AIG had a grand day out. But the Wall Street that Rush Limbaugh worries was "bailed out" is gone. The funds were used -- correctly -- to keep the system working not individual firms. Paulson took on the role of JP Morgan in 1907.
What JP Morgan the company did, spreading rumors and having friends at the New York Fed mention a lifeline to hammer Bear Stearns' share price, was worthy of the man. JP Morgan and his cronies used rumors about the Knickerbocker Group to incite a panic, thus justifying the creation of the Federal Reserve...which happened to have a lot of their financier friends as the initial governors.
So if you're comparing Paulson to JP Morgan, you're more correct than you realize. This wasn't a bailout. It's a takeover.
I don't agree that "this time LIBOR didn't measure risk." It measures how much money a lender is willing to give up to avoid risk.
I never said it didn't measure risk. Look again. What I have been saying all along is that the LIBOR-Treasury spreads don't mean a liquidity problem.
Interest rates don't really show what lenders are willing to give up, but rather how much they demand for the use of the loaned assets. There are different interpretations of interest rates. Keynesians view it as compensation for not having your money, which is valid if not simplistic. Austrians view it as an indication of time preference. In both cases, a higher interest rate shows that the lender believes there's an increased risk.
If it's up 700 bps, I don't care if the lender is afraid of little green men, there is a problem if the financial market in aggregate is unwilling to trust other institutions.
In a free market, there's nothing wrong with lenders being afraid. Would you rather have them imprudently lend out money just for the sake of lending? That's what the bailout is all about. The major banks are being told to lend the money "or else," haven't you heard? And that's whether or not they sought bailout money in the first place. Paulson's tactic of summoning the banking heads, not letting them leave the room unless they agreed, makes Vito Corleone ("an offer you can't refuse") look as libertarian as Murray Rothbard.
I agree that government sowed the seeds of the panic with easy money, forced loans, goofy regulations and the like, but aside from Senator Schumer talking down IndyMac, I don't hold them responsible for the velocity of the unwind. It was a good ol' global panic.
I certainly hold them responsible. They both planted and cultivated this disaster. Read again what I wrote: from both parties came the absurd talk of "the worst financial crisis since the Great Depression." Every time that idiot Paulson opened his mouth, decision-makers couldn't possibly do anything rationally (meaning logical decisions according to natural market conditions). They had to rethink their decisions based on what they expected the government to do. That's why, in addition to the prospects of a President Obama, markets have been unexplainably volatile.
We can argue whether the Fed or Treasury should have a role as lender of last resort, and I am pretty sympathetic to your case that they do not. Again, in this very real context, that role is expected and it would be foolhardy to discover antiHamiltonianism suddenly and unexpectedly.
It's fine if there's a lender of last resort -- a fully private lender. If it's a government agency, or one with the power of government, then it comes down to lending at my expense. If it's the Fed "injecting liquidity," then it penalizes me via inflation. If it's the Treasury, I'm penalized via taxes.
Efficacy? Again, I cite the renormalization of LIBOR and TED spreads. Banks are confident enough of worldwide liquidity and (gasp!) government intrusion to feel they can make loans.
How can it be "renormalization" when Treasury yields are at record lows? That means that the spreads are "normal" again only because LIBOR have been pushed very low:
1-month LIBOR: 1.48 this week, 3.53 one month ago, 4.78 a year ago
3-month LIBOR: 2.18 this week, 3.83 one month ago, 5.00 a year ago
6-month LIBOR: 2.55 this week, 3.70 one month ago, 4.86 a year ago
Your mistake, the same as many others, is looking at a relative indictator. But a spread doesn't necessarily mean anything, so pay attention to what's happening to the absolute indictators.
Fifty percent a good buy? The two days when the $700B package first did not pass, we lost $1.4T in market capitalization -- 50% of the rescue package is 25% of two days' losses. That does not "prove" my point, but it puts a scale on the discussion.
Do you believe that the Fed's flow of funds rate will show a sudden decrease of $1.4 trillion in the country's net worth? I hope you don't. Look here for a good discussion that unfortunately degenerated quickly, and I had to pimp-slap this guy around.
The losses are compensated by the fact that people valued other things more, so a decline in stock prices is offset by an increase in other assets' value. Look at the increase in Treasury security prices, for example. What you're talking about is saving some people from losing $X in their investments' value, via government artificially propping up their values. Simultaneously, people who in a free market could have bought the assets at a cheaper price are now harmed, because government manipulation forces them to pay more.
And Hayek would tell you that no one, whether you or government, has the information to know that the markets' true value really was the pre-drop value. What we do know is that if the drop happens in a free market, where all individuals by their individual actions help determine prices, then by definition the assets were over-valued.
I cannot contradict your moral arguments, as I said, those will leave scars.
In the end, the immorality of the bailout is the ONLY argument. If the bailout works, fine, you can reap all the benefits. Just don't coerce me into going along for the ride, no matter how profitable it may be.
Posted by: Perry Eidelbus at November 18, 2008 9:29 PMNovember 14, 2008
Looming Bailouts
Krauthammer on the real reasons.
As we have seen with the airlines, bankruptcy can allow operations to continue while helping shed fatally unsupportable obligations. For Detroit, this means release from ruinous wage deals with their astronomical benefits (the hourly cost of a Big Three worker: $73; of an American worker for Toyota: $48), massive pension obligations, and unworkable work rules such as “job banks,” a euphemism for paying vast numbers of employees not to work.The point of the Democratic bailout is to protect the unions by preventing this kind of restructuring. Which will guarantee the continued failure of these companies, but now they will burn tens of billions of taxpayer dollars. It’s the ultimate in lemon socialism.
Read it all.
Loved this:
In World War II, government had the auto companies turning out tanks. Now they would be made to turn out hybrids. The difference is that, in the middle of a world war, tanks have a buyer.Posted by: jk at November 14, 2008 1:32 PM
November 10, 2008
On New Monetarism
I was pretty lonely in my support for David Roche's "New Monetarism" last December. I was intrigued by the book's suggestion that derivatives and new mechanisms for leverage had "created" currency outside of central banks and used it as an argument against inflation predictions.
The thesis of the book, however, was gloom and doom: that these securities would be difficult to unwind and that central banks would find their powers lacking when they tried to restore liquidity. Roche has something of an I-told-you-so in the Asia WSJ today. Actually it is shorter on gloating than I would have been, but Roche portends further problems for emerging markets:
Most emerging markets don't have sufficiently robust domestic demand to offset the impact of falling exports as well as an overhang of surplus capacity in the export sector. Their domestic economies are just too small. In China, for example, the consumer accounts for only 36% of demand and investment for 42%, much of it export-related. In the U.S., the figure for the consumer is 70%.Emerging-market exports were not the only beneficiary of excess credit growth. Capital flows were just as important. Excess liquidity flooded into these economies in the form of portfolio and FDI inflows. This boosted currencies and bloated domestic money supply and credit. In turn, this drove up asset prices and so created more wealth and more demand. Unsurprisingly, the private sector in these countries spotted the opportunity to borrow cheap money in weak currencies and built up massive amounts of dollar and yen debts and foreign exchange derivative liabilities.
Roche is right in that he's repeating what everyone else already said, and he's wrong for attributing it to his "New Monetarism." There was no new money created, only bad investments spurred on by government. Remember that Fannie and Freddie were THE agents responsible for recyling money, by buying up mortgages (whether or not they were securitized) from lenders. Still, there was no new money created, only new liabilities.
Posted by: Perry Eidelbus at November 10, 2008 4:06 PMOctober 26, 2008
Weather Underground: Kill the "die hard capitalists"
From LGF: Bill Ayers' Terrorist Group Discussed Genocide of Americans (includes video)
Quoting Larry Grathwohl, an FBI informant and member of the Weather Underground, in a 1982 documentary on the group:
"I want you to imagine sitting in a room with 25 people, most of which have graduate degrees, from Columbia and other well-known educational centers, and hear them figuring out the logistics for the elimination of 25 million people.And they were dead serious."
I wonder if McPalin's last week of TV ads will include anything from this list. Though I suspect it may require pictures of Obama and Ayers building pipe bombs together to get through to some people.
Hat tip: Blog brother Cyrano
Population planning, from abortion to forced sterilization, has always been part of the liberal/collectivist agenda.
"In order to stabilize world populations, we must eliminate three hundred and fifty thousand people per day. It is a horrible thing to say, but it's just as bad not to say it." No one batted an eye when Jacques Cousteau said this completely contemptuous thing.
Posted by: Perry Eidelbus at October 26, 2008 2:23 PMOctober 25, 2008
Depression 2.0?
Hey, it's not me! I am ThreeSources's sunny optimist!
Buuuuut, I look at where we are headed politically and where we are now and I get a little concerned. So, too, is Professor N. Gregory Mankiw in the NYTimes:
[W]hen Olivier Blanchard, the I.M.F.’s chief economist, was asked about the possibility of the world sinking into another Great Depression, he reassuringly replied that the chance was “nearly nil.” He added, “We’ve learned a few things in 80 years.”Yes, we have. But have we learned what caused the Depression of the 1930s? Most important, have we learned enough to avoid doing the same thing again?
I think the FOMC is smarter, but I see an Obama Administration and 111th Congress ready to hop on the Hoover-FDR Express. Who doesn’t think this crew would double down on more taxes and regulation if their first round doesn't produce prosperity?
October 24, 2008
Must Read on the Panic of 2008
Blog friend Everyday Economist again shows why he's the academic and I am the partisan hack. The work of John Maynard Keynes has been used to justify government spending and intrusion. President Nixon famously and prematurely said "We're all Keynesians now."
FA Hayek and the Austrian School in general have been used to promote the individual over the collective and the private over the public.
EE discards politics and marries prominent economic theories from Lord Keynes and Hayek in a smart and extremely readable piece on "The Artificial Boom."
This analysis is by no means the only example of what economic theory has to say about the current financial crisis and the preceding boom. However, this analysis should serve to demonstrate that, looking back on the past six years or so, the artificial boom and subsequent bust in the United States, which is now spreading throughout the world, can be better understood in light of the pioneering work of F.A. Hayek and John Maynard Keynes. Until we begin to take uncertainty seriously and understand the limitations of price level stabilization, no amount of regulation or intervention will prevent such a crisis in the future.
October 22, 2008
American Journalism Dismantled by ... a Democrat
If John McCain is going to win this election it will be with the help of great Americans like Orson Scott Card. A science fiction writer (who's work dagny likes) he's also a Democrat and a newspaper columnist published in North Carolina. And according to Rush Limbaugh (where I first heard this) he's far enough left to be pro gun control. And yet, he takes American newspapers apart:
I remember reading All the President's Men and thinking: That's journalism. You do what it takes to get the truth and you lay it before the public, because the public has a right to know.This housing crisis didn't come out of nowhere. It was not a vague emanation of the evil Bush administration.
(...)
This was completely foreseeable and in fact many people did foresee it. One political party, in Congress and in the executive branch, tried repeatedly to tighten up the rules. The other party blocked every such attempt and tried to loosen them.
(...)
Isn't there a story here? Doesn't journalism require that you who produce our daily paper tell the truth about who brought us to a position where the only way to keep confidence in our economy was a $700 billion bailout? Aren't you supposed to follow the money and see which politicians were benefiting personally from the deregulation of mortgage lending?
I have no doubt that if these facts had pointed to the Republican Party or to John McCain as the guilty parties, you would be treating it as a vast scandal. "Housing-gate," no doubt. Or "Fannie-gate."
(...)
But right now, you are consenting to or actively promoting a big fat lie — that the housing crisis should somehow be blamed on Bush, McCain, and the Republicans. You have trained the American people to blame everything bad — even bad weather — on Bush, and they are responding as you have taught them to.
(...)
If you at our local daily newspaper continue to let Americans believe — and vote as if — President Bush and the Republicans caused the crisis, then you are joining in that lie.
If you do not tell the truth about the Democrats — including Barack Obama — and do so with the same energy you would use if the miscreants were Republicans — then you are not journalists by any standard.
You're just the public relations machine of the Democratic Party, and it's time you were all fired and real journalists brought in, so that we can actually have a news paper in our city.
Every blogger should link this column.
Every American should send it to his local newspaper.
October 20, 2008
We Must Look to Canada and France for Economic Leadership
A protectionist presidential candidate has a large polling lead, and a protectionist party is slated to increase its gains in Congress. It seems we may have to leave it to France and Canada to keep prosperity and freedom alive. WSJ Ed Page:
Prime Minister Stephen Harper and President Nicolas Sarkozy of France signed an agreement Friday to begin negotiations for a free trade pact between Canada and the European Union. A Canada-EU study released last week outlines the joint economic benefits of such a partnership, with two-way trade estimated to increase 22.9% by 2014.
We are so doomed.
Ha. I never thought I would say this, but here I go:
If they win the white house, I will move to Canada.
~T. Greer, noting that Harper is just as much a right-winger (if not more of one) as McCain is.
Posted by: T. Greer at October 20, 2008 2:11 PMDon't get sick, tg! (eh?)
Posted by: jk at October 20, 2008 2:15 PMOctober 19, 2008
Bonuses Heading to Bailed Out Firms
Financial workers at Wall Street's top banks are to receive pay deals worth more than $70bn (£40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year - despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.Staff at six banks including Goldman Sachs and Citigroup are in line to pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted criticism. The government's cash has been poured in on the condition that excessive executive pay would be curbed.
Alex, I can't say that you are wrong, but I am uncomfortable with your discomfort.
Before attaining full-on high dudgeon, I'd suggest a better source than The Guardian. The Guardian opposes all things capitalist. There is certainly every chance that they have this story right, but like the NYTimes blasting Cindy McCain, this story serves their running subplots too well.
Like the AIG bacchanal you linked to, many in the finance industry will hold on to the old ways all the way down.
I don't want to see frustration at Wall Street (or what used to be Wall Street) excesses promoting support for a new SarbOx or overly harsh regulations that hamstring the rescue plan. You want to hire a guy for $60,000 to manage the Gub'mint's new $700 Billion portfolio? You want to impose "golden parachute" restrictions so that bad money managers cannot be fired?
Grouse if you want, but our new Democratic Overlords are teeing up to take unprecedented control of business and finance. I don't want to help them (remember Road to Serfdom?)
Youse all can probably imagine how incensed I am that my firm, which is NOT being bailed out, is meanwhile cutting bonuses. I mean, how gratified could I possibly be that whatever I get, it will be taxed heavily (based on my *total* income for the year) to bail out these buttholes that screwed up their companies and now expect a federal bailout at others' expense.
As I recall, we were the second biggest shareholder of both Fannie and Freddie. We were also among the top five shareholders of both Lehman and AIG. And guess what, we're still profitable, paying out dividends! At least so far. Later this month we'll release our Q3 numbers, and it might be negative. It would still be our first negative quarter in several years.
Posted by: Perry Eidelbus at October 19, 2008 10:24 PMThere's merit to your argument, jk, but it's not just a matter of compensation. These firms want a rescue via tax dollars from the rest of us, because only via government force could we be on the hook for their bad decisions. And then they have the unmitigated gall to dole out bonuses when they're supposedly in trouble!
Once a year, my firm's top executives have a retreat at whatever posh hotel in Manhattan or Westchester, some nice place where they can sequester themselves and brainstorm. This year, they did everything on-site at our Manhattan HQ. Eliminating the expense isn't going to make a dent in our bottom line, but it's not just a token effort to bolster our shareholders' confidence. It demonstrates our responsibility to them that we're cutting the fat to maximize what dividends we give them. So just as our investment strategies put our clients' best interest first, our fiscal policies put our shareholders' best interest first. And as I mentioned before, my firm isn't being bailed out. We happen to have had good leadership and more sensible (i.e. not super-leveraged) portfolios for our clients, so we're still making a profit and paying out dividends. So far. Who knows what our next earnings release will say, but we've been doing better than most of the Street.
There's an easy way to make sure capitalism works: let capitalism work! That might seem redundant, but remember that by definition, that requires keeping the government the hell out of things, including determining compensation. Then Wall Street can bail itself out, with each company attracting "salvage experts" according to what salaries and benefits are offered. I must draw the line when the payouts are made possible only because of taxes the rest of us are paying.
I'm thinking back to when John Mack was criticized for (gasp) accepting $20 million annually to return to Morgan Stanley as CEO. Well, even $50 million per year would have still been a bargain, for he turned things around from the mess that Purcell left. Under anyone else, Morgan Stanley might have lost hundreds of millions, if not billions. Now his negotiating skills have kept Morgan Stanley alive during this government-created "crisis." Tonight I won't get into how the feds put a gun to his and others' heads in making them accept partial takeovers; that's for another day.
Posted by: Perry Eidelbus at October 19, 2008 10:49 PMWell said, Perry. And I appreciate the insider's perspective. And I agree with your leadership showing the way, that's a superb point.
I'm concerned about the tsunami of regulation and litigation that is headed toward the financiers the nanosecond the smoke clears. SarbOx will look like a jaywalking ordinance next year. Rep Waxman will hold hearings, Rep. Frank will draw up legislation, and President Obama will have a big Rose Garden signing ceremony.
If I may use the inflated locution popular on blogs: this will be the end of capitalism in the United States!
Financiers are the hardest folk to defend and they are not going to have any friends when they defend capitalism in the Waxman hearings. The Guardian crowd has been trying to bring them down for, well ever, and now the populist right is set to join them. The Guardianistas (as they're called on Samizdata) will never listen, but I'd like to keep ThreeSourcers firmly ready to defend capitalism -- even if it means defending some execrably bad New Yorkers (present company excluded, Perry!)
October 15, 2008
Dagny
There can be no John Galt, without a Dagny Taggart.
If the courageous Randian banker (I'll wait while you finish laughing) Kaminsky seeks exists in real life, she would have protested at the imposition of FDIC premiums, the creation or expansion of the Community Reinvestment Act, the empowerment of Fannie Mae and Freddie Mac, and (need I go on?)
Everybody who is left in the sector is complicit and comfortable with broad and undefined overlap between industry and government. The others all got other jobs long ago. Where do you think Senator John Corzine and Secretary Hank Paulson came from?
Sorry, it's more about Adam Smith than Ayn Rand -- business becomes quite comfortable with regulation and intervention, learning to use it to best advantage.
October 14, 2008
Nobel Laureate Krugman
David Henderson of the Hoover Institution is no fan of Paul Krugman's acerbic NYTimes punditry. But he does write a nice guest editorial today in the Wall Street Journal to defend Krugman's earlier work as being worthy of the Nobel Economics prize.
But Mr. Krugman's defense of free trade is not what earned him the Nobel Prize. Rather, he was honored for his work in the late 1970s explaining patterns of international trade, and for his work in the early 1990s on economic geography.In the late 1970s, Mr. Krugman noticed that the accepted model economists used to explain patterns of international trade did not fit the data. The Hecksher-Ohlin model predicted that trade would be based on such factors as the ratio of capital to labor, with "capital-rich" countries exporting capital-intensive goods and importing labor-intensive goods from "labor-rich" countries. Mr. Krugman noticed that most international trade takes place between countries with roughly the same ratio of capital to labor. The auto industry in capital-intensive Sweden, for example, exports cars to capital-intensive America, while Swedish consumers also import cars from America.
I'll admit to having zero knowledge of his earlier work. I know only the "barking mad" partisan who trades on his former academic glory. Nor do I trust the Nobel folks that his anti-Bush screeds were not powerful inducements to his selection.
But I will look for the article referenced where Krugman gives a quick explanation of Ricardo for non-economists. I have failed at that exercise a hundred times and would welcome help.
UPDATE: Don Luskin is a little less kind: Krugman’s Posthumous Nobel "This year’s prize in economics goes to an economist who died a decade ago."
October 12, 2008
Freddie & Fannie
Hi, My name is John McCain... and I told you so!
McCain's letter -- signed by nineteen other senators -- said that it was "...vitally important that Congress take the necessary steps to ensure that [Fannie Mae and Freddie Mac]...operate in a safe and sound manner.[and]..More importantly, Congress must ensure that the American taxpayer is protected in the event that either...should fail."
Letter after the jump.
Yet the McCain camp will cut another ad on Ayers.
Posted by: jk at October 12, 2008 2:51 PMOctober 11, 2008
Quote of the Day
The Crash: "Why has the market dropped so much?" everyone asks. What is it about the specter of our first socialist president and the end of capitalism as we know it that they don't understand? -- IBD Ed Page
October 9, 2008
Blame it on flippers?
Don Luskin links, approvingly, to an interesting alternative take on the Panic of '08. Of course, he has to link approvingly as in it he is called "the nation's best economist" (for the record, I’ll put Mister Luskin in the top three).
The guest post by Robert Ridgeway has a hilarious if not totally safe for work headline and suggests that home speculators were enabled by easy subprime loans, that they were excessively leveraged, and that they contributed to the crash in prices and foreclosures, compared to owner occupants, who had less leverage and more reason to pay their mortgages.
This makes a lot of sense and is doubtless a strong and underappreciated factor. But the nation's best economist responds "Absolutely right." And I find one substantive piece of his reasoning flawed. He assumes that ARMs are bought by flippers and that owner occupants bought fixed rate. He provides convincing data that show a huge discrepancy in foreclosures between the two groups.
I suggest, however, that a pile of owner occupants could not resist the immediate gratification of the Zero-down ARM. Sure, it's the perfect vehicle for a flipper, but it's equally enticing to a guy who wants to buy a new plasma TV, is it not?
I refinanced three times during the subprime glory years (starting a start-up, keeping a start-up alive, and recovering from a start-up) an each time was pushed toward an ARM by the broker. "C'mon, you're going to refinance in there years anyway!" I resisted, not realizing Rep Barney Frank would buy me out. But I was close enough to it that I cannot ascribe all the ARMs to flippers.
Flippers on ARMs? What the hell kind of blog are you running here?
jk -
Came across your site thanks to your trackback to Richard's guest post. Good stuff here - I'll be back in the future.
Sorry you had to trackback twice. For some reason my site makes me approve trackbacks manually before they show up.
Posted by: Conservatism Today at October 9, 2008 8:43 PMjk:
Thanks for the recognition on your site and your commentary regarding my post at Conservatism Today.
I did want to clarify that Don Luskin's response of "...Absolutely Right" to me was referring to the subprime and FHA subject of my last two paragraphs and the unintended consequences I outline on what will happen now to subprime and The FHA.
I apologize for not making that more clear.
Don was nice enough to link to my post and he is a truly magnanimous person.
And my weak writing skills probably led you to your conclusion that I assumed only fixed rate borrowers were owner occupants. You are quite correct that there was a boatload of ARMs written to owner occupants. What I was hoping to convey was the fact that the speculators chosen instrument in the subprime blowup could only be the ARM- and the 0 down was the most coveted.
BTW- Cool site. I'll be back to visit.
Richard
Richard & Conservatism Today:
Thanks for the kind words. We sure agree on Don Luskin; he has answered every dopey little email I ever sent him (though he hasn't gotten back to me about my uncle with the fortune tied up in Nigeria...) Both a brilliant and stand up guy.
Your post added a significant and important facet of the panic. I love speculators in free markets, but I think we can add "flippers" to the list of victims that don't deserve a lot of sympathy. Their profits were real, their losses should be as well.
Make yourself home around here, and I encourage the multitude of ThreeSources readers (three, four, five...) to check out Conservatism Today
October 7, 2008
Celebrating the Bailout
Days after federal officials agreed to an $85 billion bailout of American International Group, the insurance firm spent more than $440,000 for a corporate retreat at a swanky California resort. An invoice from the week-long getaway, a copy of which you'll find below, was obtained by the congressional panel that has been holding hearings this week about Wall Street collapses and executive excess. The late-September AIG gathering at the St. Regis Resort in Monarch Beach cost $443,343, according to the invoice.
Let them all crash and burn.
A lot of ThreeSourcers don't support executive pay caps, but The Refugee does for any company that is a recipient of bailout money (now or in the future). Not tied to ideology, his reasoning is perverse: asking the government for money should be less enticing than an appointment with a sadistic proctologist. The guy who makes the call should feel the pain right along with the taxpayer.
Posted by: Boulder Refugee at October 7, 2008 6:30 PMOctober 3, 2008
Fannie Mae Buddy
In case you were looking for conflicts of interest or appearances of impropriety.
Barney Frank's "partner" an executive at Fannie Mae.
One Admission
A new ad from the NRCC
Will somebody please show that spot to Senator McCain?
Posted by: jk at October 3, 2008 3:35 PMWhat a RACIST and HOMOPHOBIC ad! And then it quotes Artur Davis, who has now outed himself as a gay-bashing race-traitor!
It doesn't matter how true or legitimate any claims are, the ad is still RACIST and HOMOPHOBIC!
Posted by: Perry Eidelbus at October 3, 2008 4:08 PMHouse Passes Bailout
Wasn't even close this time.
Freddie and Fannie
Bring the family.
October 1, 2008
The Panic of '08 -- Blame China?
A good friend of ThreeSources sends a link to this commentary in Commentary by Gordon Chang. It's a good piece and I find much to agree with. But his central tenant is that China holds a lot of culpability for our current woes and that changes in Sino-US economic relations are required to get us past it. It's a good and very short piece worth reading in full.
American lenders have had too much money at their disposal in recent years because China has lent staggering sums to America, especially the U.S. Treasury, Fannie, and Freddie. Beijing has done that because the United States is the place where most excess cash in the world goes. The Chinese have excess cash because they have excess savings. They have excess savings because the government depresses internal consumption and creates massive trade surpluses-like last year’s US$262.2 billion (all of which but $5.9 billion related to sales to the United States). Beijing runs up massive trade surpluses because it manipulates the value of its currency to provide a cost advantage, provides below-market credit to producers, depresses the cost of labor, and subsidizes crucial manufacturing inputs like energy and water. When a country engineers excess savings, it has no choice but to lend funds abroad.
My emailer asks "Is it bunk?"
I would not call it is bunk, but I would not give some elements the same stress that he does.
Excess liquidity is a good backdrop to any bubble. ThreeSources folk bitterly cling to their Austrian Economics and the Austrian Business Cycle Theorem (ABCT) lays much of the blame for bubbles on monetary policy. I am not nearly as ready to blame China (on a few fronts) as is Mr. Chang. Excess liquidity comes from the Greenspan Fed’s “accommodative” monetary policies. The Fed Funds rate was kept at 1% for years. That is virtually daring people to borrow. So I’ll join Chang in citing excess liquidity as an important cause, but I’ll give China a free pass. How dare they buy our bonds! “Dad, if you continue to give me this extravagant allowance, you’ll be to blame if I become a slacker!”
I have a running debate with two of my economic betters about the extent to which new derivatives allow money to be created outside of Central Banks. I hold that they do to a greater extent than Perry or The Everyday Economist will allow. But even I hold the FOMC ultimately responsible if an over-abundance of dollars are printed.
Nor do I share Chang’s concern for Chinese currency valuation. What they really did was to outsource their central banking to the US with a dollar peg and I would say that it served them pretty well. As bad as their bubble was, I think the dollar peg ameliorated it. I heard a lot of protectionists worry about the “artificially low Yuan.” If you want to sell me stuff too cheap, I’m not one to complain.
Chang then gives the US Government a free pass. I’ll say plenty of nasty things about authoritarian China’s fear society, but I will not blame them for buying too many of our bonds or selling us goods too cheaply. If you get the time machine and can go back, Terminator style, to fix our current problems, I would suggest:
1. Rein in Fannie Mae and Freddie Mac. Set the way-back machine far enough to prevent their birth if you can, but at the very least pass the reforms that President Bush and (some) GOP legislators proposed in 2004 and 2005. Cut their leverage in half and you cut the current mess to a fourth.
2. Get Andrea Mitchell to dope Greenspan’s tea and get him to raise rates to at least 2% before handing the reins over to Princeton Boy.
3. Strangle mark-to-market accounting in the crib. Bank regulation makes accounting a legal endeavor. These rules are too harsh and give short sellers too powerful a tool to take a bank down.
4. Laugh the Community Reinvestment Act out of Congress. Do not require banks to make bad loans, they seem to do pretty well on their own.
Get halfway there on all of those and there’s no panic. I don’t fault China, but I do agree with Chang that both politicians have completely whiffed on this one.
Just a few brief points for now. Dollars that the Chinese lend to us is not "excess liquidity," for the simple reason that they come from our own money supply. And it certainly is dollars that they lend right back to us, because it makes no sense to turn their huge trade surplus of dollars into euros or whatever, when they need dollars to buy U.S. dollar-denominated securities. So you're absolutely correct to say that it comes down to the Fed. For the same reason, Chinese lending is not inflationary, because the Chinese aren't creating the dollars in the first place (aside from counterfeiting, whose effect is minimal).
Also, blaming China for lending us is the same BS as accusing mortgage lenders and credit card providers of "predatory lending."
"If you want to sell me stuff too cheap, I'm not one to complain."
Remember what Bastiat said: if someone's selling you something at a cheaper price than you'd otherwise buy, it's a *gift* to you. It can also backfire against attempted "dumping," as Herbert Dow showed the German bromide manufacturers. I've had the privilege of Burt Folsom telling me that story in person.
Posted by: Perry Eidelbus at October 1, 2008 9:51 PMGreat post, JK. Agree with PE that China cannot increase our money supply even when considering M2 and M3; only the Fed can do that.
Posted by: Boulder Refugee at October 2, 2008 11:01 AMSeptember 30, 2008
Defending James Glassman
It has to be done.
One of my favorite writers (and Buffy-sire) Jonathan V. Last has a little fun this week on the Galley Slaves blog. In About That Financial Crisis, he provides thumbnail photos of two books: "Why the Housing Boom Will Not Go Bust" and everybody's favorite whipping boy "Dow 36,000."
Fair enough and funny. If your innards don't squirm a little bit looking at the jacket thumbnails, you're not paying attention.
But it occurs to me that Gloom-and-Doom books outsell Bullish books by a healthy margin. Dow 36,000 is Glassman's personal albatross (Do you get wafers with that, Mister Coleridge?) It's been the butt of many a joke. And, when your bold prediction fails spectacularly, you deserve it. Back to the "But" part, I never see the Bears on CNBC when the DJIA crests new highs. "Mister Schilling, in your best-seller, 'We're All Totally F$%^ed Now.' you promised bank failures in 2006 -- what do you have to say for yourself, four eyes?"
We have a bias toward pessimism and cynicism -- which are a lot easier to predict. Long term, I have to throw my lot in with Kudlow. Free market capitalism will prevail even against the shackles we encumber it with. Human spirit and creativity will prevail. I'd be a buyer right now.
If I had any money.
Or if I could get a loan.
September 29, 2008
C'est Cheese!
Just in time for the failed bailout:
WSJ
Campbell and cheese giant Kraft are also teaming up to promote meals of soup and grilled-cheese sandwiches. Kraft's Web site will add recipes for cheap sandwiches and suggest Campbell soups to pair them with.On Nov. 2, newspapers nationwide will carry coupon inserts pitching Campbell soups and sandwiches made with Kraft Singles cheese as the "wallet-friendly meal your family will love."
It is a big shift for food makers. For several years they have tried to increase their profit margins by promoting higher-priced "premium" brands such as Campbell's Pepperidge Farm cookies and Kraft's Wheat Thins crackers.
I laugh to keep from cryin', boys. BR is right, now is a good time to stock up on ammunition. Remember back in oh-seven when we used to have Wheat Thins®?
Just for the record, this is not the $8 cheese to which The Refugee previously referred.
We'll know it's really bad when Kraft starts adversting meals "easily made in a tent after a long day in the unemployment line" and recipes such as, "Spit-roasted squirrel ala Central Park," or the old classic, "Pigeon with popcorn stuffing."
Posted by: Boulder Refugee at September 29, 2008 4:01 PMI was debating whether to include the modifier "government" cheese or not.
Posted by: jk at September 29, 2008 4:40 PMSeptember 28, 2008
Kudos To GOP Legislators
Can I have a mirabile dictu? The House GOP seems to have removed the worst parts of the "bailout bill." Minority Whip Roy Blunt ($$ - MO) offers a Side-by-Side Comparison of the Paulson Plan, the [Rep. Barney] Frank - [Sen. Christopher] Dodd bill, and the final compromise.
Damn, Sam. Admittedly this is Blunt's report, but it looks like the worst elements were stripped (payola to ACORN and union dictation of CEO compensation) and that most of the limitations to the Paulson plan are probably positive.
I am unhappy to see limits on compensation, but they may be caveatted out of existence: "For equity participation, over $300M total ban for top 5 executives on golden parachutes and tax deduction limit on compensation above $500,000." Sounds like a few escape hatches to me. Dodd wanted to hire some bureaucrat to manage a $700 Billion portfolio and pay him $75K, so the compromise looks good.
As Senator McCain said, Democrats and Republicans "worked together" to craft important legislation. But, praise NED, it looks like the Republicans won.
Hat-tip: Instapundit
PE: You're mistaken on one key point. That is, there is not sufficient liquidity in the system. Many banks do not have money to lend, even to worthy borrows.
As an example, my sister is the CFO of a small bank. This bank owned $1 million in Fannie/Freddie securities. The bank examiners have REQUIRED them to write down the value to $0. With that accounting move, the bank's capitalization ratios on their balance sheet no longer permit them to loan money (FDIC rules). As long as their current loans continue to perform the bank will survive. But the only way to get back into a position to lend money is by retiring existing loans and getting the capitalization ratios back in compliance.
This problem is systemic. Are there banks with enough cash to still loan money? Probably, but as you say, they are reluctant to do so because of the risk to their balance sheet and regulatory compliance.
If banks are able to unload those Fannie/Freddie securities, they will still take a bath. However, their capitalization ratios will allow them to get back into the business of loaning money.
BTW, I offered to take the Fannie/Freddie paper off her hands for book value... she said I'm long line behind a number of shareholders.
Posted by: Boulder Refugee at September 29, 2008 12:10 PMYou're failing to see the difference between the supply of loanable funds and what funds are being loaned out. Just because I'm not lending out what I *could* doesn't mean there isn't money to lend. Right now, global credit markets still have plenty of money, just not a desire to make loans. You've mentioned Caterpillar a few times now, but it's no different a situation than anyone else's: nobody wants to take the risk of lending Cat any money. That is, nobody wants to take that risk *at the prices Cat is offering*. Markets will clear if prices are allowed to adjust on their own, and if Cat must offer higher interest rates to lure investors, so be it. That doesn't mean there isn't money to lend out.
Right now, investors would rather flee for the safety of commodities (gold, oil) and even U.S. Treasury securities, rather than what the federal government wants American taxpayers to buy up. Austrian Business Cycle Theory teaches us that this is not inherently a bad thing. After the last several years of lending excesses, created and spurred by government interference in markets, we're seeing a necessary contraction as errors are eliminated from the market.
What's falsely perceived as "a lack of money to lend" is actually "a lack of trust to lend money." A lot of banks currently don't trust each other's ability to repay loans. They're waiting to see who's next to fail, merge and/or be bought out. This is perfectly sound behavior: a free market would allow participants to wait things out until they can get quality information.
What we have instead is the Federal Reserve "injecting liquidity" as part of its self-anointed role as "lender of last resort," and now the federal government is the "buyer of last resort." This by definition skews what neoclassical economics would call the optimal alignment of supply and demand forces. Austrian economics clarifies further: government interference has no profit motive and thus perpetuates errors, hindering entrepreneurs (who by definition have a profit motive) who would eliminate errors from markets. Austrian market processes in a nutshell: because information is imperfect, supply and demand are not naturally aligned, but it's the entrepreneur who seizes upon profit opportunities and thus brings them toward (if not to) alignment.
Now, back to what the Fed and feds are doing. Why should I, via inflation, be punished because someone couldn't get a loan except by central bankers creating new easy money? Why should I, via taxes, be forced to "invest" in something that I would otherwise not touch at all? "Collectivist" is the only word that can describe this: the individual is subjected to the whims of the majority, sharing in others' successes (if they are successful) but made to share the costs of their failures.
"This bank owned $1 million in Fannie/Freddie securities. The bank examiners have REQUIRED them to write down the value to $0. With that accounting move, the bank's capitalization ratios on their balance sheet no longer permit them to loan money (FDIC rules).
In a free market, your sister's bank would still be able to lend money if it has it, and its account holders could pull their money out if they don't like the bank's risk-taking. And instead of various regulations to prohibit/restrict behavior, bank officers can be held in check by courts. If they intentionally misrepresent material facts, they'll go to jail for fraud.
Do you see the real problem here? Government made worse what it created in the first place. Instead of letting people buyers and sellers determine what they think is the true value, the federal government is going to use our money to buy things here and now.
BTW, our firm, uh, was one of the top shareholders of Freddie and Fannie. And Lehman. And AIG. We took a real bath, but we're far more diversified than four companies, so we'll survive. Knock on wood, we're one of the few bigger companies who are still profitable. Our share price has taken a beating, but we're still paying a dividend. It's helped that we never did investment banking and thus never leveraged ourselves or otherwise exposed ourselves to the huge risks that ML, Bear Stearns and Lehman did.
"As long as their current loans continue to perform the bank will survive. But the only way to get back into a position to lend money is by retiring existing loans and getting the capitalization ratios back in compliance."
Do you see the irony? This comes from the same federal government that imposes such a standard on a bank while itself accumulating more and more debt (that others must pay!) as a regular routine.
"This problem is systemic. Are there banks with enough cash to still loan money? Probably, but as you say, they are reluctant to do so because of the risk to their balance sheet and regulatory compliance."
And trust, as I explained above.
"BTW, I offered to take the Fannie/Freddie paper of her hands for book value... she said I'm long line behind a number of shareholders."
Of course, the government is forcing the book value of zero, as you stated. Forced. Why not a true market value? Simply letting people act freely would do wonders to fix what government hath wrought.
Government states a book value of zero, then declares what's probably a too-high value on other things. Once again, if the latter is such a good deal, let others take the risk, instead of making me ride along. Is it too much to ask that I be left alone, that I not be coerced into joining what I deem a ride into hellfire?
I miswrote something earlier: Obama didn't say he'd postpone his social spending because of the bailout. He actually said he'd postpone his...middle class tax cuts. As if the Clinton Era proved we'd have gotten them anyway.
Posted by: Perry Eidelbus at September 29, 2008 2:56 PMOne thing I meant to add to the first paragraph. Or just because I'm not able to lend out money doesn't mean others aren't able (although waiting) to lend out money.
There's plenty of liquidity already! Kudlow is so full of it.
Posted by: Perry Eidelbus at September 29, 2008 2:59 PMSo government regulators have REQUIRED banks to write down the value of assets on their books to zero. Gee, that sounds familiar. [second link]
And "even the worst" of those assets "are worth no less than 40 cents on the dollar" yet the government has it's own price - 20 cents on the dollar. That sounds familiar too. [second comment]
Posted by: johngalt at September 29, 2008 3:41 PMPE: Not sure I'm getting the nuance between "would lend it but don't have it" and "have it but won't lend it" from a liquidity perspective. Businesses that file chapter 11 because they can't roll over a routine line of credit at an affordable rate won't care. Moreover, this puts the financial system into a death spiral.
I agree that current regulations are a serious problem, i.e. those cited, and contributed to the crisis. However, those are the rules the government set and that the companies played by. It's no more helpful to say, "Shouldn't have done it" than Obama's position on Iraq that "we shouldn't have gone in there." The fact is that we are in both situations and must deal with them.
I do support a switch, even retroactive, from mark-to-market to mark-to-model and would be interested in your thoughts in that regard.
Posted by: Boulder Refugee at September 29, 2008 6:03 PM"PE: Not sure I'm getting the nuance between "would lend it but don't have it" and "have it but won't lend it" from a liquidity perspective."
Well, let me try to put it this way. Paulson, Bernanke and Kudlow claim it's the first. That means there's no money available, regardless of how much people want it, no matter how "worthy" people are to borrow.
But the truth is that all the "injections" by the Fed are unnecessary. The truth is the latter example. There's money out there, but lenders are extremely cautious -- as they should be in these uncertain times. What they need most is *time*, because once things start settling down, they'll be able to gauge who can pay back money and who's not worth the risk.
"Businesses that file chapter 11 because they can't roll over a routine line of credit at an affordable rate won't care. Moreover, this puts the financial system into a death spiral."
Not necessarily. Only those who survive by repeated borrowing won't make it, which isn't a bad thing. Perhaps it's about time they relied on a more stable business model.
"I agree that current regulations are a serious problem, i.e. those cited, and contributed to the crisis. However, those are the rules the government set and that the companies played by. It's no more helpful to say, "Shouldn't have done it" than Obama's position on Iraq that "we shouldn't have gone in there." The fact is that we are in both situations and must deal with them."
Actually, blaming regulations is a warning that we need to let the market be free: more government won't get us out of it! As many have said, you don't rely on the arsonist to put out a fire that he set in the first place. So when Pelosi and Obama blame "deregulation," as they did today, it's a flat-out lie.
"I do support a switch, even retroactive, from mark-to-market to mark-to-model and would be interested in your thoughts in that regard."
I'm not an accountant, but I take a simple Austrian view: let buyers and sellers agree on whichever method works best for them. I personally view the clash over accounting methods as a red herring. It's coming down again to government setting rules that could very well be wrong. Both have strengths and weaknesses.
Mark-to-market realizes that we may not know something's true future value, so at the time we can only value it based on a current market price. Mutual funds' NAV, and margin account values, necessarily go by MTM. Part of my job is approving employees' personal investments based on being low enough that they won't negatively impact our clients' trades, and when they're trading options or futures, we go by what's effectively MTM. The problem is when you bought something for $1 million, and if it declines in value, mark-to-market means your books will show a loss. But in fact, you won't experience a loss unless you're actually trying to sell the whatever at that moment. If I buy a $500K house that in a year is worth less, even if it's down to zero, that doesn't necessarily mean I'll go bankrupt.
Now when you're dealing with something illiquid and/or uncertain in value, mark-to-model is useful. But even so, it inherently leaves people free to value changing/uncertain prices pretty much at whatever they want. Warren Buffett's been to correct to call it "mark-to-myth," although not to the extent he'd like us to think. But a lot of investing companies have used it to hide losses in their investments, and if they had had to report things based on mark-to-market.
In the end, we need not complicate things with accounting methods. We need only to let buyers and sellers be free to agree on a price, and for each side to accept the consequences of the decision without using government to coerce others into bailing out one or both sides. Putting this into an example, if you're going by mark-to-model in what you're offering to sell me, but I insist on mark-to-market, we of course won't agree. But it's not the accounting method that's important, it's the *price*. Value is subjective, however you calculated it.
Posted by: Perry Eidelbus at September 29, 2008 11:17 PMSeptember 26, 2008
Mark-to-Market or Mark-to-Model?
This, to The Refugee's ignorant eye, seems to be a pretty good primer on the difference between mark-to-market and mark-to-model accounting rules that may have precipitated the current financial crisis.
Brian Wesbury has a superb paper (pdf) that claims mark-to-market is 70% of the problem and that rescinding the rule should be 100% of the solution.
It is true that the root of this crisis is bad mortgage loans, but probably 70% of the real crisis that we face today is caused by mark-to-market accounting in an illiquid market. What’s most fascinating is that the Treasury is selling its plan as a way to put a bottom in mortgage pool prices, tipping its hat to the problem of mark-to-market accounting without acknowledging it. It is a real shame that there is so little discussion of this reality.
I've been the ThreeSources cheerleader for the plan, but must admit that this piece is the most compelling argument against it that I have encountered.
Posted by: jk at September 28, 2008 4:10 PM
Abject Terror of the Day
I'm a Kudlow optimist who is bullish on the long term prospects of the American economy. And I'm not quaking in my boots, selling stock, or loading up on water and ammunition.
But I have real concerns about the near term economy and am willing to suspend ideology if it means averting a liquidity crisis. There's no shortage of information or clever arguments for both sides. Here are four for mine, which is: the potential cost of doing nothing is too great, even a bad plan might calm markets; even the government will not lose the whole $700B; Secretary Paulson is as trustworthy to me as any of our 535 economists in chief, far more so than 532 of them.
1) Caterpillar’s 325 bps premium for financing over a similar loan just a few months ago. This is not Joe's Widgets, this is for CAT corporate debt.
2) Friend of a friend and long-time trusted commercial real estate developer is trying to refinance a $4 Million property and cannot get a loan of $900K.
3) A letter to Mankiw:
A LOT of payrolls get paid at the end of the month. The next for many companies is September 30. Three different people with hugely relevant knowledge said to me today words to the effect of: "Why don't your economist buddies want
[insert fortune 100 company/companies here] to be able to pay their employees on Tuesday. If Washington doesn't do something now, they won't be able to". That just scared the hell out of me. I can go into more details if you like, but all of them involve the four horsemen of the apocalypse.
4) Megan McArdle captures my sentiment:
Again, no one knows. Not $700 billion--that's the amount we're paying for distressed assets, some of which will yield profits. The entire portfolio of fire sale securities may lose money, but it's unlikely to be anything close to the entire amount.In some sense, the reason to do the bailout is that we don't know. I don't want to give money to GM because I have a pretty good notion of the scale of a GM collapse. Some people will lose their jobs and get new ones, the steel industry will take a hit, and a lot of managers will be looking for another line of work than pushing ugly, underperforming cars. On the other hand, I have no idea how far a bank collapse might spread. And I'm really not eager to find out.
Me either. Give the bald guy the damn money.
First of all, let's be clear: one can never have too much ammunition!
The problem, as you point out, is that it's impossible to accurately assess the value of these loans in the short period of time available. The only way to be sure that this does not become a huge give-away is to make sure the financial institutions involved have plenty of skin in the game. The Refugee has a moderate amount of faith in House Republicans, who seem to have suddenly rediscovered a principled spine, to drive a hard bargain.
Posted by: Boulder Refugee at September 26, 2008 3:27 PMThere used to be, in this country, a reliable and accurate way to assess the value of property. Old-timers called it "the free market."
Posted by: johngalt at September 28, 2008 2:30 AMSeptember 24, 2008
A Solid Critique of the Paulson Plan
ThreeSources friend The Everyday Economist pens a thoughtful post that compares the current situation to the S&L Crisis and the Paulson Plan to the Resolution Trust Corporation (RTC). It's a good read, allowing you to relive the 80s without big hair and skinny ties.
He comes out foursquare against the plan at the end, by economic and not ideological reasons. I'm not prepared to join him there at this time, but many cite the success of the RTC as a model for the Paulson Plan and the EE develops enough differences to force consideration.
jk, when the government breaks something, I don't want it to fix it. Don't you think the federal government's track record shows we shouldn't trust it, particularly when bailouts just get worse and worse?
To reword an old saying, "Where free-marketers fear to tread." There's a very, VERY good reason that the private sector doesn't want to take the risk on these bad securities, at least not at these prices. If it were so possible for government to make a great profit in this bailout, then Buffett would have jumped all over them first. The man by himself could have bought out the remains of Lehman Brothers, but he didn't.
Oh, and I point I made elsewhere: if you think Paulson with these proposed powers would be bad, how much worse would it be with the powers wielded by an Obama choice for Treasury Secretary?
Posted by: Perry Eidelbus at September 25, 2008 12:59 PMActually, Refugee, Hoover did NOT let the market sort itself out. Hoover's response was "make work" public works programs and...tax hikes. Sound familiar? "Tax hikes" included the Smoot-Hawley Tariff, which destroyed global trade.
As it turned out, FDR merely continued and amplified what Hoover started. And after FDR's platform said that taxes are too high, power should be given back to the states from the federal government, and that money should be made sound by being backed by gold.
Posted by: Perry Eidelbus at September 25, 2008 1:07 PMFair points all around, Perry. But -- yet again this year -- laissez faire is not on the menu. I would prefer a $700B stimulative tax cut, maybe waiving cap gains for those that buy this paper today. Speaker Pelosi? Leader Reid? I thought so.
Why will I, then, agree to incur the liability against future taxation? Because I have bought into the seriousness of the situation. Caterpillar's paying a 325 basis point premium over an offering from a few months ago is unsettling. Secondly, I have bought in to the idea you dismiss of the government's ability to hold these until conditions improve. Andy Kessler suggests that government can actively reflate to improve conditions (warning: not safe for metalists!) Buffett could play here but he chooses to play conservatively. It's hard to name too many others who could buy enough - a'la Soros -- to drive the market, and none are quite as well capitalized as Sec Paulson.
I could be proven wrong on both counts, of course. We're predicting uncertain futures. I really don't want to live through a full blown liquidity/credit crunch, and I'll go all in with Paulson today to avoid it.
"laissez faire is not on the menu."
And that's the problem. If we don't like the menu, we should be able to pick up and choose a different restaurant. It's far beyond "getting old" that we have to pick between Beelzebub and Mephistopheles.
You need to ask yourself: do you really trust the guys who created this mess in the first place to get us out of it? As the saying goes, "Ye shall know them by their fruits." Look at what they've given us so far, and rely on *that* to predict their future track record, not their promises today of peace, land and bread. I don't trust Paulson for a second, particularly when the initial plan is to give him incredible powers without any oversight.
A $700 billion tax cut would be AMAZING for the American economy. You'd see domestic and foreign investment return with such confidence, because maybe there won't be as much profit, but the feds won't be stealing a chunk. Problem is, $700 billion of tax *cuts*, not what could be taxed, would require eliminating cap gains on $4.6 trillion worth of profit.
Coyote Blog had a great observation: the same Democrats who are afraid to privatize Social Security have no problem blowing $700 billion on this. It's "too risky" to let people invest for their own retirement, but it's ok for them to spearhead the federal government buying up the worst securities on the market today. Great deal!
Oh, and speaking of Soros: his hedge fund lost at least $120 mil on Lehman, depending on when it bought the shares. I cackled for five minutes at that. Shows how great his investment instincts are when he doesn't have someone on the inside, huh? Or maybe he did and believed Lehman's executives.
Posted by: Perry Eidelbus at September 26, 2008 9:21 AMPE, as with most political gambits we are talking about degrees of intervention here. Arguably, Hoover pretty much did everything wrong, e.g., constrict capital, raise taxes, tariffs and public works.
The bigger issue is the environment that the Wall Street crash created: immense domestic pain (25% unemployment) etc. etc. that created the conditions under which the New Deal could be passed. My non-interventionist ideals are in conflict with my practical realities. I would prefer some bailout to conditions that would foster a second New Deal.
That said, I'm pleased that the House Republicans are pushing back. They may be onto something. That is, much of the problem may be caused by accounting rules such as mark-to-market that artificially devalue some finanicial assets and thereby hurt liquidity. Can we get out of this without a massive bailout and without a public uproar for big government? The Refugee has all of his digits crossed.
Posted by: Boulder Refugee at September 26, 2008 12:59 PMActually, BR, the Great Depression would have been only a few mild recessions, had the federal government not intervened. History could very well repeat itself today, if the federal government succeeds in "preventing a collapse" when what we actually need is the complete collapse of a few companies, which will then be absorbed, rather than everyone fall "equally."
Remember, and this is some of the best wisdom you can pass on to your children, that collectivism is about bringing the successful down to the level of the unsuccessful, whether it's taxing income or ensuring "equality of outcome" -- including "bailouts."
For further reading on the Depression: http://eidelblog.blogspot.com/search?q=%22great+depression%22
Oh by the way, some "conservative" in comments at alarmingnews.com is accusing me of "championing economic liberalism" because I oppose the bailout. WTF?
Posted by: Perry Eidelbus at September 27, 2008 11:42 AMSeptember 22, 2008
Investment
The word "investment" has become so debased as a politician's euphemism for "spending" that most have stopped looking at the difference. Don Luskin spots one:
The fundamental mistake is that the $700 billion would be used to invest in income-producing assets, not to fund consumption. A dollar spent in Head Start, say, or in socialized health care, is gone forever, even though its expenditure may produce a benefit for whomever receives the service it funds. But a dollar spent on a mortgage earns interest, and can eventually be sold -- perhaps even at a profit. And in the meantime, if the government's temporarily holding these assets helps unlock the US real estate and securities markets, then so much the better. To be clear, I'm not endorsing the federal government investing $700 billion in private assets. But love it or hate it, it is investment -- not consumption.
Luskin never says that it is a good investment, and he provides for difference and discussion. But it is worth looking at the bailout in these terms and remembering that the gub'mint actually did turn a profit on the RTC.
That's what The Refugee loves about this country - irrational optimism!
Posted by: Boulder Refugee at September 22, 2008 3:36 PMMea Maxima Culpa!
I had a hunch I was wrong when I found myself siding with Bill O'Rielly against the WSJ Editorial Board. Reading this, I declare full capitulation:
McCain told 60 Minutes tonight that he would name New York State Attorney General Andrew Cuomo, son of former New York Gov. Mario Cuomo and Secretary of Housing and Urban Development (HUD) under President Bill Clinton, as chairman of the U.S. Securities and Exchange Commission, Mike Allen reports.“I've admired Andrew Cuomo,” McCain said. “I think he is somebody who could restore some credibility, lend some bipartisanship to this effort.”
AND MAKE ELLIOT SPITZER COACH OF THE GIRLS' VOLLYBALL TEAM?
I know stupidity reigns so thick at 60 Minutes that it's hard to stay focused, but this is the dumbest thing I have heard all campaign and falls well outside of the "let McCain be McCain" rubric. If he wants to play Teddy Roosevelt and rail about greed, I can shudder and look the other way. When he wants to promote Spitzerism to the SEC, it's game over. I'm going back to bed. Wake me up after Obama wins.
Hat-tip: Mickey Kaus "Note to my conservative friends: Hope Palin's worth it!" via Instapundit
Once Upon a Time
A little preaching to choir here, but don't miss the WSJ lead editorial today:
Once upon a time, in the land that FDR built, there was the rule of "regulation" and all was right on Wall and Main Streets. Wise 27-year-old bank examiners looked down upon the banks and saw that they were sound. America's Hobbits lived happily in homes financed by 30-year-mortgages that never left their local banker's balance sheet, and nary a crisis did we have.Then, lo, came the evil Reagan marching from Mordor with his horde of Orcs, short for "market fundamentalists." Reagan's apprentice, Gramm of Texas and later of McCain, unleashed the scourge of "deregulation," and thus were "greed," short-selling, securitization, McMansions, liar loans and other horrors loosed upon the world of men.
Now, however, comes Obama of Illinois, Schumer of New York and others in the fellowship of the Beltway to slay the Orcs and restore the rule of the regulator. So once more will the Hobbits be able to sleep peacefully in the shire.
They are sadly right that this will become believed and accepted as fact. This could set the cause of liberty (and prosperitarianism) back a lot further than a bad election.
September 19, 2008
The Refugee's Allies
Blog brother br is way too classy to hide behind the WSJ Editorial board, so I will make his "I Told You So!" post on his behalf.
The refugee and I had a small difference of opinion yesterday on Senator McCain's bruising criticism of SEC Chairman Chris Cox. BR was disturbed that it was scapegoating in lieu of a serious understanding. I agreed on the lack of understanding but suggested that I would not defend Cox, and that it might be smart politics to take a few whacks at a Bush Administration official.
My freedom mentors and intellectual betters at the WSJ Ed Page come down squarely in br's camp today:
To give readers a flavor of Mr. McCain untethered, we'll quote at length: "Mismanagement and greed became the operating standard while regulators were asleep at the switch. The primary regulator of Wall Street, the Securities and Exchange Commission (SEC) kept in place trading rules that let speculators and hedge funds turn our markets into a casino. They allowed naked short selling -- which simply means that you can sell stock without ever owning it. They eliminated last year the uptick rule that has protected investors for 70 years. Speculators pounded the shares of even good companies into the ground.
[...]
Wow. "Betrayed the public's trust." Was Mr. Cox dishonest? No. He merely changed some minor rules, and didn't change others, on short-selling. String him up! Mr. McCain clearly wants to distance himself from the Bush Administration. But this assault on Mr. Cox is both false and deeply unfair. It's also un-Presidential.
Gigot & Co. even defend the decision to not reinstate the uptick rule. This is something that Larry Kudlow has been calling for. Unlike the DH (against it!), I don't have strong opinions on the uptick rule. Put me down for laissez faire, but if the uptick rule (more like infield fly than DH) could keep the US and UK from banning all short selling, I'd give it a listen. Larry suggests "why don't we just ban all selling -- that would protect prices."
Reasonable blog brothers can disagree. I'm not convinced it was bad, but I would love to hear Senator Mac say something useful or true about the ECWTASTGD.
Far from being that classy, The Refugee referenced that piece in his reply to jk this morning! The Journal is far more erudite than this pathetic Refugee.
Posted by: Boulder Refugee at September 19, 2008 12:08 PMWell, it was classy to leave it in a comment and not throw it in my face...
I agree on not supporting the narrative of a failed Bush Administration. On the same token, I don't think all of his appointments have been stellar. You and I will rush to circle the wagons when Administration officials are attacked, but we're in an electoral minority. Better to defend the Administration's successes, good policy, and good appointments.
Oh my NED! Am I really in the O'Reilly camp on this? While you get the WSJ Ed Page? I must be wrong, but I just can't see it.
September 18, 2008
Congress Tries to Fix What They Broke
"I scream, you scream, we all scream for - REGULATION!"
In contrast to the major media narrative on the current financial turmoil there are two articles that everyone must read.
The first is Congress Tries to Fix What it Broke, an editorial by Investor's Business Daily.
Regulation: As the financial crisis spreads, denials on Capitol Hill grow more shrill. Blame an aloof President Bush, greedy Wall Street, risky capitalism — anybody but those in Congress who wrote the banking rules.(…)
In other words, nobody up and down the line — from the branch office on main street to the high-rise on Wall Street — analyzed the risk of such ill-advised loans. But why should they? Everybody was just doing what the regulators in Washington wanted them to do.
(…)
The original culprits in all this were the social engineers who compelled banks to make the bad loans. The private sector has no business conducting social experiments on behalf of government. Its business is making profit. Period. So it did what it naturally does and turned the subprime social mandate into a lucrative industry.
Of course, it was a Ponzi scheme, because they weren't allowed to play by their rules. The government changed the rules for risk.
In order to put low-income minorities into home loans, they were ordered to suspend lending standards that had served the banking industry well for centuries. No one wants to talk about it, so they just scapegoat Wall Street.
The other is Zachary Karabell's Bad Accounting Rules Helped Sink AIG, a WSJ editorial.
The current meltdown isn't the result of too much regulation or too little. The root cause is bad regulation.Call it the revenge of Enron. The collapse of Enron in 2002 triggered a wave of regulations, most notably Sarbanes-Oxley. Less noticed but ultimately more consequential for today were accounting rules that forced financial service companies to change the way they report the value of their assets (or liabilities). Enron valued future contracts in such a way as to vastly inflate its reported profits. In response, accounting standards were shifted by the Financial Accounting Standards Board and validated by the SEC. The new standards force companies to value or "mark" their assets according to a different set of standards and levels.
The rules are complicated and arcane; the result isn't. Beginning last year, financial companies exposed to the mortgage market began to mark down their assets, quickly and steeply. That created a chain reaction, as losses that were reported on balance sheets led to declining stock prices and lower credit ratings, forcing these companies to put aside ever larger reserves (also dictated by banking regulations) to cover those losses.
(…)
Among its many products, AIG offered insurance on derivatives built on other derivatives built on mortgages. It priced those according to computer models that no one person could have generated, not even the quantitative magicians who programmed them. And when default rates and home prices moved in ways that no model had predicted, the whole pricing structure was thrown out of whack.
The value of the underlying assets -- homes and mortgages -- declined, sometimes 10%, sometimes 20%, rarely more. That is a hit to the system, but on its own should never have led to the implosion of Wall Street. What has leveled Wall Street is that the value of the derivatives has declined to zero in some cases, at least according to what these companies are reporting.
There's something wrong with that picture: Down 20% doesn't equal down 100%. In a paralyzed environment, where few are buying and everyone is selling, a market price could well be near zero. But that is hardly the "real" price. If someone had to sell a home in Galveston, Texas, last week before Hurricane Ike, it might have sold for pennies on the dollar. Who would buy a home in the path of a hurricane? But only for those few days was that value "real."
No matter what else you hear or read on this subject, keep these two articles in mind.
The Refugee was about to rant that everyone seems to have forgotten Eliot "Stockings" Spitzer's now-discredited prosecutorial targeting of AIG and CEO Hank Greenberg. However, a quick Internet search proved otherwise.
Upon indictment, AIG stock dropped something like 45% and never recovered. This substantially hampered the company's ability to raise capital. An alternate universe does not exist to determine if AIG would have failed anyway, but it's worth contemplating what role prosecutorial abuse may have played. Right next to the calls of "Wall Street greed" let's put "political hubris." Spitzer can be the poster boy - from the waist up, please.
Posted by: Boulder Refugee at September 19, 2008 4:10 PMWell, everybody who is not doing Google® searches for "Spitzer, AIG, Screwed it up" probably has forgotten it.
We'll hear a thousand times about Phil Gramm revoking Glass-Steagall, but nobody is going to remind us of Fannie, Freddie, or "Client Number Nine."
Don't be so sure, jk. Yes it's only the Limbaugh faithful hearing it but today (Monday, 9/22) he's trumpeting "all roads [in the investment failures] lead to Fannie and Freddie and their Democrat buddies - Chris Dodd, Barney Frank, Nancy Pelosi, Franklin Raines..." No mention of Spitzer yet though.
Posted by: johngalt at September 22, 2008 3:22 PMGents - in this highly divisive political environment it is very easy to point to the opposite side for the present troubles. But before pointing fingers to Freddie, Fannie and the friends of the democrats, consider two things:
1: FRE and FNM until recently were Govt. sponsored organizations. Which means they had a govt. regulator appointed by a republican administration with the blessing of a republican congress for the bulk of the period of such excess
2: The root cause, cheap liquidity, can be tied down to the Greenspan Fed, a self proclaimed republican.
3: If not for FRE and FNM, could President Bush have touted "home ownership is at its peak" or something to that effect.
Heretic:
I'll concede the point on "highest home ownership;" without the bubble that would probably be true just by growth but would not have been dramatic enough to brag over.
I'm less interested in exonerating Republicans that free markets. Republicans frequently act against freedom (else we wouldn't bother blogging around here). But some free market forces, notably the WSJ Ed Page and (surprise!) Senator John McCain saw this problem developing and pushed or called for correction. Rep. Frank and Senator Dodd said everything was fine and cashed some big checks.
The GSE is a bad model and I'll happily a Republican who suggests it.
September 16, 2008
Don Luskin on FOXNews
I didn't think that could happen -- the Murdoch enforcement field is weakening somehow.
Anyways, Luskin's WaPo Op-Ed got some favorable coverage last night on Brit Hume's "Grapevine." Roll tape:
Greed and Gravity
ThreeSources friend the Everyday Economist links to a superb blog post by Lawrence H. White (EE calls him "Larry" but I don't know him well enough for such liberties).
On campus this afternoon I overheard the following remark by a non-economist, trying to explain to another non-economist the Lehman failure and today's stock market decline: “It’s a combination of deregulation and greed. Boy, if you deregulate enough, the greed will follow.”If I had butted in, I would have made two points. (1) If an unusually large number of airplanes crash during a given week, do you blame gravity? No. Greed, like gravity, is a constant. It can’t explain why the number of crashes is higher than usual. (2) What deregulation have we had in the last decade? Please tell me. On the contrary, we’ve had a strengthening of the Community Reinvestment Act, which has encouraged banks to make mortgage loans to borrowers who previously would have been rejected as non-creditworthy. And we’ve had the imposition of Basel II capital requirements, which have encouraged banks to game the accounting system through quasi-off-balance-sheet vehicles, unhelpfully reducing balance sheet transparency.
When I saw the excerpt, I was afraid that the author was whacking Senator John McCain. Sadly, Senator Mac has internalized TR too much, He reflexively blamed yesterday's meltdown on greed (gravity). Of course, Senator Obama blamed it on President Bush, so I am not really declaring a winner here.
But I expect a little more from Republicans, naive waif that I am.
Chuck "The Schmuck" Schumer was on "Hardball" last night, spewing the same "greed" and "deregulation" nonsense. And Chris Matthews looked like he was eagerly hanging on every word that idiot said, at one point grasping his pen with both hands and leaning forward slightly.
"Deregulation," what nonsense. Repealing the Glass-Steagall Act is often blamed for the subprime mess but actually did NOTHING beyond what was already there. Allowing commercial and investment banks to merge, and the ability to collateralize mortgages into securities, wouldn't have done anything without the very fact that people were buying homes they couldn't afford, and that mortgage lenders were being given carrots and sticks to give out subprime loans. In fact, collateralization of anything, not just debt obligations, doesn't make it possible to sell that underlying something. It only makes it *easier* to buy it in a bundle and at the amount you want. Investors, through whichever broker they use, could still buy a bunch of securities from a bank, but the popularity of CDOs made it much easier. There's nothing inherently wrong with that, either: as an investor, your punishment for a bad investment is built in.
Meanwhile, you can't tell me (some of you may recall I work in compliance) that the SEC and other government entities aren't regulating things. There is immense regulation everywhere you turn. The problem is that the regulation breeds moral hazard: investors think that if something is regulated (let alone it'll be backed by the government), it must be safer. Do we really think that Lehman would have lasted so long if investors didn't have the comfort of knowing it was buying "regulated" CDOs? Hell no: investors would have run for the hills once Lehman "announced intentions" to buy "these ultra-risky mortgage-backed securities that could lose all value at any time."
On the subject of Fannie and Freddie, it is FACT that they are responsible for the majority of the problems. Lenders made bad loans, which were collateralized, and Fannie and Freddie were all too eager to buy them. It is also fact that they were able to do so courtesy of their charters that gave them explicit backing by the federal government. THEY are the companies who grew too big, because government birthed, bred and fed them. I'm hardly the only one who warned that people are fooling themselves if they thought the federal government wouldn't step in to "save" them.
Posted by: Perry Eidelbus at September 16, 2008 12:15 PMAmen, brother.
The IBD has a nice editorial detailing the extent to which regulation caused it.
Obama and Democrats on the Hill think even more regulation and more interference in the market will solve the problem their policies helped cause. For now, unarmed by the historic record, conventional wisdom is buying into their blame-business-first rhetoric and bigger-government solutions.
While government arguably has a role in helping low-income folks buy a home, Clinton went overboard by strong-arming lenders with tougher and tougher regulations, which only led to lenders taking on hundreds of billions in subprime bilge.
Market failure? Hardly. Once again, this crisis has government's fingerprints all over it.
Posted by: jk at September 16, 2008 12:28 PM
The financial market is probably second only to pharmaceuticals in terms of regulation.
Actually, the solution is quite simple. Let's pass a law that prohibits stock and home values from ever declining. That'll solve it.
Posted by: Boulder Refugee at September 16, 2008 12:58 PMSeptember 15, 2008
Tough Love
The WSJ Ed Page (and I) agree about some tough love for the financial system:
The result will be a very rough Monday, but the government had to draw a line somewhere or it would have become the financier of first resort for every company hoping to buy a troubled firm. Especially with the Fed discount window now wide open to many more financial institutions, and to many kinds of collateral, Treasury Secretary Hank Paulson's refusal to blink won't get any second guessing from us. If Lehman is able to liquidate without a panic, and especially if its derivative contracts can be safely undone, the benefits would include the reassertion of "moral hazard" on Wall Street. The Merrill acquisition before it faces a Lehman-like run should also reduce the risk of contagion.
Besides, a complete meltdown of the banking system should take some San Dieagans mind off of football
UPDATES: Let's tack on some quotes of the day:
-- "Lehman Brothers, aren't they the guys who make the cough drops?" -- Don Luskin on Kudlow & Co. last week-- "Remember, if it’s black smoke, they haven’t chosen a Pope come up with a deal for Lehman; if it’s white smoke, they have".-- a rare QOTD appearance for Paul Krugman (ht:ee)
-- "You know the world is coming to an end when Lehman Brothers closes its doors, and the Cubs pitch a no-hitter." -- Club for Growth's Andrew Roth
September 13, 2008
It was the worst of times, and it was the worst of times.
Don Luskin takes on the pessimists in a WaPo guest Editorial today:
Barack Obama has frequently used the Depression exaggeration, including during a campaign speech in June, when he said that the "percentage of homes in foreclosure and late mortgage payments is the highest since the Great Depression." At best, this statement is a good guess. To be really true, it would have to be heavily qualified with words such as "maybe" or "probably." According to economist David C. Wheelock of the Federal Reserve Bank of St. Louis, who has studied the history of mortgage markets for the Fed, "there are no consistent data on foreclosure or delinquency going all the way back to the Depression."The Mortgage Bankers Association (MBA) database, which allows rigorous apples-to-apples comparisons, only goes back to 1979. It shows that today's delinquency rate is only a little higher than the level seen in 1985. As to the foreclosure rate, it was setting records for the day -- the highest since the Great Depression, one supposes -- in 1999, at the peak of the Clinton-era prosperity that Obama celebrated in his acceptance speech at the Democratic National Convention late last month. I don't recall hearing any Democratic politicians complaining back then.
Even if Obama is right that the foreclosure rate is the worst since the Great Depression, it's spurious to evoke memories of that great national calamity when talking about today -- it's akin to equating a sore throat with stomach cancer. According to the MBA, 6.4 percent of mortgages are delinquent to some extent, and 2.75 percent are in foreclosure. During the Great Depression, according to Wheelock's research, more than 50 percent of home loans were in default.
[...]
Here's another one not to be too alarmed about: Obama is flat-out wrong when he frets on his campaign Web site that "the personal savings rate is now the lowest it's been since the Great Depression." The latest rate, for the second quarter of 2008, is 2.6 percent -- higher than the 1.9 percent rate that prevailed in the last quarter of Bill Clinton's presidency.Full disclosure: I'm an adviser to John McCain's campaign, though as far as I know, the senator has never taken one word of my advice. He's been sounding a little pessimistic on the economy of late, too.
September 12, 2008
Where was the President?
Senator Dodd (D - Countrywide) looks to the collapse of Fannie Mae and Freddie Mac and "has the gall to ask in a Bloomberg Television interview: 'I have a lot of questions about where was the administration over the last eight years.'" Sorry for Senator Dodd, Al Hubbard and Noam Neusner answer him in the Washington Post today. The whole article is great fun, but the short answer is pretty much "dealing with intransigent House and Senate Banking Committees that refused to acknowledge a problem as they lapped up lobbying funds."
The two former Administration representatives document the number of times that concerns were raised by President Bush (including last year's SOTU) as well as President Clinton, former FOMC Chairman Alan Greenspan, Republican Senator Richard Shelby, &c.
How did Fannie and Freddie counter such efforts? They flooded Washington with lobbying dollars, doled out tens of thousands in political contributions and put offices in key congressional districts. Not surprisingly, these efforts worked. Leaders in Congress did not just balk at proposals to rein in Fannie and Freddie. They mocked the proposals as unserious and unnecessary.
[...]
As recently as last summer, when housing prices had clearly peaked and the mortgage market had started to seize up, Dodd called on Bush to "immediately reconsider his ill-advised" reform proposals. [Rep. Barney] Frank, now chairman of the House Financial Services Committee, said that the president's suggestion for a strong, independent regulator of Fannie and Freddie was "inane."
Hubbard and Neusner ask "Where was Senator Dodd?" -- Ooh, I know this one! He was at Countrywide getting a loan!
Hat-tip: Greg Mankiw
September 9, 2008
Fannie and Freddie
Two must reads on your new secondary mortgage business:
The Everyday Economist has a smart piece about Where Do We Go From Here (I have no idea whether he is a Buffy fan, but the line will get a couple of ThreeSourcers singing). His piece includes a link that exonerates Fan and Fred from the subprime imbroglio. I would personally blame these hybrid mutations for global warming and the lack of Oakland pass protection if I could, but Thomas Palley makes some good points as part of a larger picture.
The EE and I share concern over the Fed's larger role.
Perhaps more troubling is the development of new programs within the Federal Reserve to deal with this crisis. I have previously mentioned that the Fed has performed admirably in the face of the crisis, but this point needs to be better clarified. The Fed, contrary to its performance during the Great Depression, has been vigilant in its effort to serve as lender of last resort. However, as Allan Meltzer has pointed out, they have surpassed this goal and have actually become the “creditor of last resort.” This distinction is important because as lender of last resort, a central bank is an entity that serves to provide liquidity to the market whereas the creditor of last resort refers to a central bank that holds all of the bad debt that others are unwilling to hold.
He calls the Term Auction Facility a failure because it has not reduced risk spreads between LIBOR and OIS. I'm very concerned about the new Fed responsibility but would have to concede that I think it has contained their growth if it has not shrunk them. It's a smart read and I only had to look up two terms. Your mileage may vary.
It's ultimately a political problem long term as much as an economic problem short term. I suggested the other day that Senator Obama was committed to expanding public-private partnerships. Today, Senator McCain and Gov. Palin have a guest editorial in the WSJ.
The bailout of Fannie Mae and Freddie Mac is another outrageous, but sadly necessary, step for these two institutions. Given the long-term mismanagement and flawed structure of these two companies, this was the only short-term alternative for ensuring that hard-working Americans have access to affordable mortgages during this difficult economic period.We are strong advocates for the permanent reform of Fannie and Freddie. For years, Congress failed to act and it is deeply troubling that what we are now seeing is an exercise in crisis management rather than sound planning, and at great cost to taxpayers.
I like the high dudgeon, and I like the facets of the plan that Senator McCain claims credit for. I offer no comment on how legitimate his claims are, but he does pick out the good parts of Paulson's plan:
Treasury has broadly followed the McCain plan, outlined months ago, and gets at the short-term heart of the problem. That plan reinforces the federal commitment to meet our obligations and get this mess behind us. It replaces management and board members. It requires that shareholders take losses first. It puts taxpayers first in line for any repayments. And it terminates future lobbying, which was one of the primary contributors to this great debacle. (Emphasis mine)
That said, the editorial does not offer a compelling, first-principles objection to Government Sponsored Enterprises (GSEs). I know looking for libertarian first-principles from Senator McCain is a losing proposition. But most of what he says is good; he just fails to wrap it up in a big philosophical ribbon. That makes it read like a stump speech.
UPDATE: Don't miss David Harsanyi's Risk for Thee but Not for Me
Rather, economy columnist James Pethokoukis of U.S. News & World Report, asks, "doesn't this make the case for privatization, and powerfully at that? Don't forget that we are also sitting here with Social Security and Medicare leaving taxpayers on the hook for more than $50 trillion in liabilities."Isn't it ironic that government bars a citizen from risking his own Social Security funds because it's too chancy, yet it uses your money to bail out companies that have engaged in the very behavior government is supposedly safeguarding us from?
And really, what's more risky than letting Washington handle your money?
September 7, 2008
Congratulations, Taxpayers!
You're the proud new owners of a corrupt, bureaucratic, secondary mortgage institution.
Treasury Secretary Henry Paulson says the actions were being taken because "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."The huge potential liabilities facing each company, as a result of soaring mortgage defaults, could cost taxpayers tens of billions of dollars, but Paulson stressed that the financial impacts if the two companies had been allowed to fail would be far more serious.
BUT WAIT!
Because Secretary Paulson called within the first twenty minutes -- they threw in another failed public political institution! That's right you get TWICE the liabilities!!
I jest. I cry. But mostly, I try to point out that Fan & Fred are textbook examples of the private-public partnership that Senator Obama and the Democrats always claim are the answer. They'll give us a health care Fannie and an energy Freddie. All the profits will go to well connected political types (Franklin Raines, paging Mister Franklin Rains...) and the liabilities will all go to the American taxpayer.
Senator Obama loves to talk about "millions of green collar jobs" that he will create (Government create jobs?) and that he will "put a million hybrids" on the road (government production planning?) Keep in mind that what he will create is a stream of hybrid public-private-not-fish-nor-fowl bureaucracies.
The Fannie and Freddie takeover could be instructive if anyone were listening.
August 21, 2008
Martinomics
The best Starbucks® The Way I See It I have yet to encounter. #112:
If you've got a dollar and you spend twenty-nine cents on a loaf of bread, you’ve got seventy-one cents left. But if you've got seventeen grand and you spend twenty-nine cents on a loaf of bread, you’ve still got seventeen grand. That's a math lesson for you. -- Steve Martin Comedian and actor
August 19, 2008
jk Turns Hawkish on Inflation
I have been the inflation dove around ThreeSources. I still consider a core CPI in the low "twos" to be manageable, but I think we are getting beyond that and am willing to concede that long term headline inflation cannot be ignored.
Brian Wesbury has an excellent guest editorial in the WSJ today. The First Trust Advisors Chief Economist and frequent Kudlow guest is a smart guy and a cool head. He's pretty slow to call for falling skies, but he has some serious 1970s-ish concerns about where we are now.
One would think that the odds of a repeat [of 1970s inflation] were low, and for 20 years, after Ronald Reagan and his Fed Chairman Paul Volcker had the courage to get inflation under control with tight money and tax cuts, this was true. Unfortunately, the lessons seem to be fading. Today, the U.S. (and through it the world) faces its greatest threat from inflation in 30 years. And as in the past, this threat is being met with denial and political expediency.Today's problems began seven years ago in 2001, when the Federal Reserve overreacted to the deflationary mistake it made in the late 1990s. The Fed vigorously pumped money into the economy in order to drive interest rates down rapidly.
Though I am still not calling for Bernanke's head on a pike, any fair observer would have to suggest that he is no Volcker. And I've seen the guys running for President -- neither is Ronald Reagan.
A good economist should be smart and lucky, and Wesbury may be both. The day his column runs, the WSJ news pages report a 27-year record rise in the PPI last month.
I think the FOMC's taking back 25 bps and suggesting another before year end would send a strong signal and leave us with what no sane person would call "tight money."
I'd suggest the Wesbury piece to even ThreeSourcers who do not get animated about monetary policy (odd eggs that you are). It's very readable and accessible.
Finally!
Posted by: Everyday Economist at August 19, 2008 3:46 PMAugust 7, 2008
Dude, Where's My Recession?
(1,000,000 thanks to James Pethokoukis for that line! Sadly, those are 2001 thanks, equivalent to about 920,000 thanks today...)
Don Luskin is at Disneyland:
THANK GOD THERE'S A GLOBAL RECESSION GOING ON Otherwise Disneyland would be really crowded! This photo was taken this morning at the front gate an hour before the park opens to the public -- this is just the "magic morning" people staying at the park's various hotels, who get admission one hour early. They've lined up like this at 7:00 am.
I'll admit you can go too far with this anecdotal stuff. But every time I sit and wait in the Starbucks drive-through in the middle of a weekday afternoon, I bore my wife with the same observation.
Not to say things are perfect, but a lot of people still line up at Disneyland and to buy $4 coffee on Thursday afternoon.
July 31, 2008
Home Run!
Megan McArdle, my favorite libertarian Obama supporter, hits one out of the park. The text below is formatted as a quote and I am not certain of its origins. But somebody is taking a marvelous whack at the University of Chicago professors who are protesting the Milton Friedman Institute:
"Many would argue that they have been negative for much of
the world's population... weakening ... struggling local economies"
I can think of lots of words to describe what's going on in, say, China and India, as well as what happened previously to countries that adopted the "neoliberal global order" like Japan, Hong Kong, and South Korea. Billions of people are leading dramatically freer, healthier, longer and more prosperous lives than they were a generation ago.Of course, we all face plenty of problems. I worry about environmental catastrophes, and their political, social and economic aftermath. Many people are suffering, primarily in pockets of kleptocracy and anarchy. Life's pretty bleak about 5 blocks west of the University of Chicago. In my professional life, I worry about inflation, chaotic markets, and their possible death by regulation. There is a lot for thoughtful economists and social scientists to do. But honestly, do we really yearn to send a billion Chinese back to their "local economies," trying to eke a meager living out of a quarter acre of rice paddy, under the iron grip of some local bureaucrat? I mean, the Mao caps and Che shirts are cool and all, but millions of people starved to death.
This is just the big lie theory at work. Say something often enough and people will start to believe it. It helps especially if what you say is vague and meaningless.
Read the whole (very short) thing. Hat-tip: Instapundit
Sure seems that way to me, but McArdle is the real deal.
Posted by: jk at August 1, 2008 2:30 PMNot if she supports Obama, and it takes only one thing to destroy your credibility.
It's one thing to like someone as a *person*, but no true libertarian could possibly support the candidacy of a raving socialist who wants to hike taxes and redistribute wealth, someone who not just believes in big government but *worships* it and wants to make it *the* driving force in our economy.
Posted by: Perry Eidelbus at August 1, 2008 4:39 PMI agree that it strains credulity -- the Obama-libertarian overlap is pretty thin. At the same time, Reason Magazine is 80% filled with articles bashing McCain and I almost never hear the Junior Senator from Illinois mentioned.
I plan to vote for McCain who has committed multiple sins against liberty and promises more every day on the campaign trail. McArdle doesn't swoon or get shivers up her leg, and she has taken some mighty whacks at him.
I think she's crazy -- why I bring it up -- but if you're committed to gay marriage or unrestricted abortion rights, oppose the Iraq War and want us out yesterday, you can most definitely call yourself a libertarian -- and Senator Obama's your guy!
Prosperitarians, in contrast, cannot be seen in the Democratic Camp, even for free food.
The overlap is thin indeed -- it's just about *only* the issues you listed. Even if you say, "Well, I'll vote for so-and-so who's pretty close but not exactly what I'd like," Obama's state-worshipping, his stance on economic freedom from taxation to envirowhorism, simply means no genuine libertarian could possibly support him.
Once someone says he or she supports Obama, I know the person's a liberal and/or deluded. With his desire to "talk" to Iran and Syria, and disarm the U.S. of its nuclear weaons, we may well regret that we didn't take Bruce Bartlett's advice and support Hillary.
Posted by: Perry Eidelbus at August 3, 2008 11:53 PMJuly 30, 2008
Guys Who Can Pronounce 'Schadenfruede'
Terri at I Think ^(Link) Therefore I Err links to an article in Der Spiegel that might be the worst article ever. Who else could marry smug Eurotrash socialism with dimwitted American populism? "We've combed the whole world to come up with the worst economic advice!" (It sounds better in German).
The article is dated January 8, 2008, so the Washington correspondent can reference the Democratic primary and have a perfect tie-in for economic nonsense.
Just in time for the recession and widespread layoffs many economists fear the American economy could face this spring, the presidential campaign has suddenly found its new hot-button issue: the dark side of globalization. The mortgage crisis, declining real wages and the fear that companies could even accelerate their outsourcing activities in a recession have relegated explosions in Iraq to the role of political background noise.
Huh? No Abu Ghraib? Well, we're talking NAFTA, specifically the theft of a bunch of good jobs assembling televisions in Tennessee to a plant in Juarez. Juarez, we are to believe was some sort of lovely, desert paradise until NAFTA.
In the United States, the city has come to symbolize a system of international trade that benefits only a few and harms the overwhelming majority, a system as detrimental to the wages of American workers as it is to moral standards.
Nein, danke, Herr Steingart, I seriously doubt many people think of Juarez as a "symbol of international trade." I'm thinking that "smelly, scary, dirty border town" would poll substantively higher.
Seriously, I went to school in New Mexico and financed one semester by driving to Juarez and smuggling back some not-quite-legal-in-the-US-yet tequila. Good stuff with a worm and all. This was more than a decade before NAFTA, and you will trust me that Juarez was a scary place. I got shot at once. Even doing the tourista parts several years later in daylight disturbed me. Sorry to contradict the good folks at the Ciudad Chamber of Commerce, but I'd suggest you pay the extra $100 and go a little further on to Puerto Vallarta or Acapulco or somewhere.
To Der Spiegel, poverty in America is caused by our past devotion to free trade. And poverty in Mexico is the fault of, well, not to put too fine a point on it, George W. Bush. Who is compared to a famous German Totalitarian Tyrant (nope, not that one):
The border crossing, in its coarseness, is reminiscent of the East German side of the former border between the two Germanys, except that the face on wall posters is that of George W. Bush and not of the former East German leader Erich Honecker.
Of course, the real problem with America and Mexico is that we have not embraced GDR Socialism:
The gap between rich and poor has grown by leaps and bounds in America, far more so than in countries like Germany. One-fifth of Americans earn more than half of all wages and salaries. Ten percent of the population owns 70 percent of all assets. This is what presidential candidate John Edwards calls the "two Americas."
Trade bad. America bad. Das ist alles.
Thanks for reading the whole thing, I never did finish after the first couple of pages.
It sounds like you've summed up what they were getting at. I kept looking for the part where they discuss the numbers of people moving from the countrysides purposefully to work at this Toshiba plant. The 54% increase in employment in said Ciudad.
No chance that Mexico's problems stem from centuries of corruption and Latin America's propensity toward collectivism.
Posted by: jk at July 30, 2008 6:26 PMJuly 18, 2008
Another Grim Milestone
James Freeman, assistant editor for the WSJ Ed Page, has a guest editorial on the, um, WSJ editorial page. It starts with some stark news:
Is the great American financial engine that gave the world Intel and Google grinding to a halt? Last quarter marked the first time in 30 years that not a single company backed by venture capital went public in the U.S.
He admits that markets are off and that there are other, exogenous factors. But a drought is a drought, and I find this a brutal reminder that while the market system is extremely durable, individual markets can be quite fragile. America's dominant capital markets have plenty of competition. And these competitors lack SarbOx and Spitzerism.
This is bad news for the U.S. economy. Does anyone think that we would be better off if Bill Gates and Michael Dell had sold out to corporate behemoths early in their careers, instead of leading their firms for years as public companies? Would consumers enjoy the same vibrant market in Web services if Yahoo had gobbled up a nascent Google? How powerful would our computers be if Intel had become an IBM subsidiary, instead of going public in 1971?
That golden goose is not immortal. This long without a venture IPO is a bad sign. A worse sign is that the American government is talking about more punishment: cutting back on Golden Goose Chow® when we need eggs, and [this metaphor has been terminated by the Editors]
I'm not sure more taxes, additional regulation, higher energy costs, and a Rube Goldberg cap and trade plan will bring capital back to the markets.
Naked Shorts Bother You?
I cringed when SEC chief Christopher Cox moved to prohibit naked shorts against Fannie and Freddie. And not just because my inner Beavis and Butthead heard Cox, naked, shorts, and Fannie in the same sentence.
In my mind, a naked short is a pure derivative play that allows a trader to bet on a stock's going down. I'm a dull, broad-index, ETF guy myself, but I believe pure option plays provide more efficient price information and get risk in the hands of those who can best handle it. This call from a sharp GOP administration official like Cox sounded like blaming oil prices on "evil speculators."
To my surprise, Donald L. Luskin strongly criticized the practice on Kudlow last night. I just sent a letter to Mr. Luskin suggesting that he expound on it. (Heh: just got a response, he says "Done." While I was typing this he answered and posted a response.)
"Naked" shorting and "naked" option-writing have nothing to do with each other, except for the coincidence of the term "naked." In the case of option-writing, the "naked" writer is simply taking a short position in a put or a call without a risk-offsetting position in the underlying asset (usually a stock). I have no problem with that at all. A short option, whether "naked" or not, is simply a contract to sell (in the case of a short call) or buy (in the case of a short put) at a fixed price by a fixed date. No issue there.However, "naked" shorting is an entirely different matter. When you sell a stock short, you are selling something you do not own. Yet the buyer requires that you deliver to him the thing he bought from you. Normally you accomplish that by arranging to borrow the shares from someone else who owns them. You sell the borrowed shares, and deliver them to the buyer in exchange for the buyer's cash. Ultimately, you expect to buy back the stock at a lower price, and replace the borrowed shares. In "naked" shorting, you sell to the buyer without any intention of borrowing stock to deliver. So on settlement day, your trade fails. You cannot deliver what you do not have. Yet when you made the sale, you were implicitly promising to deliver. After the fail, you can cure the problem by buying stock and delivering it, hopefully at a profitably lower price. But shat amounts to fraud -- in very much the same way that kiting checks amounts to fraud. It doesn't matter if you ultimately deliver. At the time of the sale, you had no intention or capability to deliver.
The WSJ Editorial page today is a little closer to my position. They're not full-throated endorsers by any means:
Not that the SEC's emergency order to bar naked short selling is quite the disaster proclaimed by some traders. It's possible that it won't do much harm, and this is a titanic achievement for any policy coming out of Washington these days. At the end of the day, the order is not a ban on all short selling, which is a bet that a stock price will fall and is a critical ingredient for efficient markets.Will the SEC rule prevent the 19 designated financial firms from reaching the valuations that investors would otherwise assign to them? Probably not. The only certain result is that Wall Street trading desks and IT departments will spend time and money scrambling to reconfigure their transaction systems by 12:01 a.m. Monday when the order becomes effective. This is sand in the gears of our financial markets and at the margin may slow down vital price signals, given the extra step required to lock down the shares before shorting them. In that way it may not benefit the firms it is intended to help because it will reduce liquidity.
I am on vacation, so I have some time to ponder Luskin's response. I understand the technical difference but I am not sure I grab a philosophical difference that makes one side a legitimate play and the other the equivalent of kiting checks. I'm keeping an open mind.
The Refugee thinks that Mr. Luskin is using the definition of "kiting" at loosely. Here is a great discussion of kiting. Basically, kiting is going from one instition to another with intent to defraud. In other words, one writes a check on Bank A to pay Bank B, and on Bank B to pay Bank C. Since the banks (often) give immediate credit for a deposit, even though they have not actually received the funds through the system.
This is very different from check floating. When one floats a check, one might pay a bill by check and drop it in the mails knowing that he has insufficient funds at that moment. He also knows that it will take a day for the mail to be delivered and another day for the check to be deposited. Therefore, on day 2 he transfers funds to cover the check. While acknowledging that this is technically illegal, The Refugee will admit to having done such and suspects that most bill payers have done so at one time or another. The key is no intent to defraud; the funds are there to cover the withdrawal. It is worth noting that that neither the financial institution nor the the Fed look at mail and deposit timing and says, "Wait, it's not possible..."
The Refugee believes that short selling contains no attempt to defraud and is therefore not analogous to kiting. If one sells short and guesses wrong, he must pay the difference and take the loss in a timely manner - just like covering a check. Open financial markets are critical to efficiency and liquidity.
One final note on efficiency. Unlike buying an selling stocks, deriviatives are a zero-sum game. For every winner, there is a corresponding loser. That's what makes them so efficient (and brutal to the casual investor). They are a perfect reflection of accurate pricing in the marketplace. If you eliminate the possiblity of either selling or buying under certain conditions, then the efficiency is lost. Some investors, rather than losing part of their investment, will lose it all. That additiona risk will be built into the equation causing even greater volitility.
Posted by: Boulder Refugee at July 18, 2008 12:44 PMI almost offered the disclaimer that this ex dirty hippie guitar player had indeed practiced bona-fide check kiting. Write rent check on account A on the 29th. Deposit check from account B into account A on the 31st. Deposit money into account B on the 3rd. You can tell from the date spreads this was a long time ago. Computers killed the kiting star.
The comparison seems apt because the check kiter has intent to pay, yet it clearly is fraudulent.
Coincidentally, I was explaining this to someone at lunchtime. Luskin is correct.
BR, you bring up derivatives, efficiency, etc., but those are beside the point. Re-read what Luskin said. This isn't about *all* short-selling, but a kind of short-selling that can very well be fraudulent.
Some people think that short-selling should be illegal, because it's supposedly selling something you own. No, you're selling something that you've *borrowed*, with the contractual promise to repay what you borrowed (by definition you're borrowing and repaying something fungible).
But naked shorting is entirely different, which were my words too at lunchtime. Naked shorting means you haven't even borrowed the shares yet. So as Luskin points out, let's say you want to short-sell XYZ. You're getting money with the implicit promise that you'll deliver the agreed-upon number of shares at settlement time. That means you have to borrow the shares by the end of settlement. So it *is* like check-kiting, because settlement typically won't happen for a few business days -- you'll have that much time to borrow the shares. But what if you can't? And that's the problem: it's entirely possible for the number of shorted shares to increase the number of floating shares (meaning shares available on the market).
The WSJ editorial is so ignorant of how financial firms' technology works. There's no need for them to "scramble" to fix technology. All a company needs to do right now is a policy change: no naked shorting, with the threat of "disciplinary action, up to and including termination" if someone breaches that rule. Then the company can look at some way to audit
Where I'll disagree with Luskin, to a very very minor extent, is that naked shorting is necessarily fraudulent, because you're receiving the money and representing that you *at the time you sell* have the shares to deliver, but the short-seller might in fact have every intent to deliver. Maybe he thinks he can borrow them but then can't. That's also I don't believe there should be any "regulations." Rather than new SEC rules, there instead should be prosecution and incarceration of people who commit naked short-selling and then don't deliver the shares. People go to jail for writing bad checks, why not for short-selling shares and then failing to borrow and deliver? Both are fraud.
Disclosure: as some of you may remember, I'm a compliance analyst on the personal trading end. Our firm is very strict, more so than just about anyone else, particularly on short-selling. We don't allow our employees to short anything that's long in our clients' portfolios.
Posted by: Perry Eidelbus at July 18, 2008 5:03 PMThe Refugee will agree with some of what PE says, that is failure to cover a short should be treated the same as writing a bad check.
That said, I disagree with the basic premise that naked shorts are inherently fraudulent. As an analogy, when I go to the bank and borrow money to buy a house, I'm representing that I'll be able to pay it back. Obviously, I do not have the money at this time to cover the debt. I'm betting that I'll earn the money in an amount and time to pay it back according the covenants. However, I may lose my job that would prevent me from paying back. Fraudulent? No. Of course, I'll lose the house and whatever equity I put into it. I realize it could be a fraudent transaction if I lie about my income or circumstances, but that fact that I do not today have the money to repay the loan does not in itself constitute the basis fraud, or we'd all be in jail.
Posted by: Boulder Refugee at July 22, 2008 3:45 PMJuly 15, 2008
Pander To The Economists
Professor Mankiw tells the candidates how:
The American Economic Association represents only a small fraction of 1 percent of the electorate. In every election season, we economists expect to be largely ignored, and, unlike many of our other forecasts, that one often turns out to be right.But suppose it were otherwise. Imagine that those running for office tailored their economic positions to attract the experts in the field. What would it take to put the nation’s economists solidly behind a candidate?
Aside from a little Pigou-sneak, I think all of his suggestions are superb! Of course, if somebody would accept them in toto I would accept the energy taxes easily in exchange for all the other ideas.
Short, sweet, true. Read the whole thing.
July 14, 2008
Can't Say They Weren't Warned
I guess we take another step toward nationalizing the secondary mortgage market this morning. Only Congress would vote to expand the scope and authority of an entity the same quarter it votes to bail it out. Everyday Economist links to a superb summary of How we got into this mess by James Hamilton at Econbrowser.
And the WSJ Ed Page offers a nice collection of editorials they have run about Freddie and Fannie, They call it Fannie Mayhem, but they could have called it I told you so.
I'm saddened but far from surprised, There was always an implicit government put on these two GSEs. Everyone knew it, it's just come out in the open.
This was so obvious to anyone who understands that government intervention breeds nothing good. It took several decades, but more of FDR's chickens have come home to roost.
"Fannie Mae is a disaster waiting to happen. The trouble is that it is neither fish nor fowl. Fannie Mae’s government connections insulate it from discipline by markets and investors. Worse yet, the markets believe (with some justification) that the federal government has (implicitly) guaranteed fannie Mae’s debts, which allows it to also avoid by market discipline by borrowing at below-market rates. Moreover, because the board includes political appointees, it is further insulated from investor discipline. The solution is privatization. Let it run as a for-profit corporation in a competitive market, with full disclosure."
Professor Bainbridge wrote that in November. November *2004*. Link
Posted by: Perry Eidelbus at July 14, 2008 3:12 PMJuly 8, 2008
Quote of the Day
Don't blame speculators for the food crisis: It was already here when they arrived. Rather thank them for a wake-up call. Financial markets are driving today's prices to match expectations of tomorrow's values – the consensus of countless investors and producers is that the era of surpluses and cheap food is over. Yet even a credible promise that G-8 protectionist policies will be reversed would raise output down the road and drop prices at the corner grocery counter overnight. -- AEI's Adam Lerrick, explaining that subsidies, not free markets, cause a misallocation of food.