My Benefits Derived from the Financial Crisis

"Crisis" is a matter of perspective:

• I just started saving for retirment, and I can now buy shares in index funds on the cheap.
• I hope to buy a house early next year, which will have a depressed price.
• The mortgage I finance the house with will have an artificially low interest rate, thanks Ben!
  
• My private student loans have an artificially low interest rate, thanks Ben! (Federal loans also, for that matter.)
  
• I can replace $7,500 in mortgage loans to a private bank with a $7,500 interest free 20 year loan from the government, and I can wait 2 years before I start repaying. I also will get a $7,500 tax credit for playing.
  
• Given the option of splitting my retirement contributions between the public employees account and a account serviced by a private provider (WaMu), I went against my urge to diversify and instead went 100% with the system that would be bailed out, if the worst were to happen. Thanks, Paulson!
  

Notes on Racial Bias in Polling and Voting

From CNN:

A small percentage of voters -- 2.5 percent of those surveyed -- said they may turn away from Obama because of his race.

The article claims that Obama will lose 6 percent due to his race, but I find no mention of whether or not they asked if anyone was voting for him because of his race.

The concern I think this article is implicitly trying to get at is what is more popularly known as the Bradley Effect or the Wilder Effect, which is the observation that sometimes black candidates do systematically worse in actual elections than they do in the polls leading up. My understanding is that the academic literature has not found this to be the case (or has disappeared), and that it is more likely a flaw in poll methodology.

For those who are more interested in that subject, I suggest they turn to this EconTalk interview with polling expert Doug Rivers and tune in a little after the 40 minute mark.

P.S. A while back the DOL was throwing out predictions for the outcome of the election. I'm betting a Democratic sweep, as both Congress and the White House go to the challengers. Note that I prefer a split, and I don't care which party gets which branch.

Spilled Milk

The Beckerian punishment of last year’s execution was not enough to ensure better food safety under restricted competition and bureaucratic state institutions. I suspect the additional oversight of the Ministry of Health that followed in 2007 only lengthened the chain of crisis response. From the first baby to become sick, it took a staggering 3 and a half months before official recognition of contamination; the numbers now stand at least 53,000 sick, 4 dead, and over 100 infants with severe kidney failure. I also doubt the arrests and detainment of 18 others will do anything to solve the systemic problems of the perverse incentives and limited information in an institutional context of collective ownership and highly regulatory bureaucracy. And the prevailing government response is…..official resignation, more regulation, and farm subsidies. Really sad.

So lets take a minute to reflect. While China was executing its food and drug czar last year, America was appointing one. But not even Krugman celebrated. Instead, he blamed Milton Friedman, capitalist ideology, and globalization for causing regulatory inefficiency by not providing federal oversight agencies with enough resources. So, in 2008 after calling the tomatoes and spinach incidents analogous to The Jungle - what did Krugman call for?

"And in the case of food, what we need to do now — for the sake of both our health and our export markets — is to go back to the way it was after Teddy Roosevelt, when the Socialists took over."

So why stop at socialism when communism is going such a wonderful job?

Two Questions

Leave an answer in the comments to these two questions:

1. Who was the more devastating president for the long run interests of the U.S. economy, Franklin D Roosevelt or George W. Bush?
   
   
2. If the U.S. becomes the socialist paradise its leaders (not to mention Stiglitz and Krugman) seem hellbent on making it, where to should Atlas shrug? That is, which country has the best mix of a strong freedom-preserving constitution and low cultural shock change?
   

Australia joins the fray...

So the Australians have joined in and banned short selling in a range of instances.

From the article:

"The Securities and Exchange Commission and the U.K.'s Financial Services Authority clamped down on the practice, which they blamed for the declines of financial stocks, late last week."

Short selling is why stocks go down? Is buying stocks why they go up? Is it scary that this is the reasoning of the regulatory agency?

I can't remember this from my derivatives class, Tom will have to fill in the details, but can't you manufacture a short-sell in a manner that doesn't involve short selling? Or is that only with options?

Hat tip: TPS Legal Expert and Protoss aficionado Dana Johnson

No Relationship Between What You Pay and What You Get

Study can be found here.

How Will This Affect Campaigning?

From CNN Instapoll:

When will you cast your ballot in this year's presidential race?

On Election Day	61%	159062
In early or absentee voting	29%	75217
I'm not voting	10%	24661
Total Votes: 258940

My guess is there will be a shift away from "appealing to the base" to get closer to the median voter more rapidly than otherwise.

Stupid Eggheaded PhD's!

From the Curious Mercantilist Capitalist:

This is not, yet, a unanimously held opinion. There is even still some debate over whether this even is a recession. But I'm thinking that's going to fade away soon. "All my cousins already know we’re in a recession," says Bob Barbera, chief economist at ITG and, coincidentally, a former Lehman chief economist. "You need a Ph.D in economics to have a debate about it." Barbera thinks that, "in the fullness of time," it will be apparent that the recession began in autumn 2007.

Of course, Barbera is likely just looking for an external villain like the recession to blame for his company's failure, but a more correct statement would have been:

You need to avoid watching the news and election campaign to have a debate about it.

Large Hadron Update

Looks like my prediction of years, not months, is looking better by the day.

Taking Aim at the Pigou Club

In a recent issue of Regulation magazine, John Nye takes the Pigouvian tax to task. His argument is basically two-fold. First, economists need to measure both the optimal level of externality and the actual externality. If Coasean bargains are taking place (to any extent), then measuring only the perceived externality will lead to too little of the externality. Second, no studies account for the myriad of other factors that either encourage or discourage externalities. For example, the government may increase pollution through subsidizing rural neighborhoods or discourage it through high taxes on automobile related purchases. Until all of these factors are accounted for, then even a perfectly accurate measurement of the Pigouvian Externality wouldn't tell us whether we have too little or too much of the externality.

Cultural Rights?

Today, I listened to Bill Ivey present the thesis of his book Arts, Inc: How Greed and Neglect are Destroying Our Cultural Rights. Here is Tyler Cowen's brief review. Here's the gist of the thesis:

1. We have "cultural rights" to things like music, art, photography.
   
2. Firms lobby for copyright law to try and profit articles we have a cultural right to.
3. Firms are successful because there is no regulatory agency, something equivalent to a Ministry of Cultural Rights.
4. Conclusion: We need a Ministry of Cultural Rights that is strong enough to balance our cultural rights against firm greed.

It was an interesting talk throughout, and he is optimistic because he has some inside info that Obama is willing to do something about. He does recognize the enormous dangers of such an Orwellian/Taliban sounding institution, he says he recognizes the importance of copyright law, and doubts that firms would be able to capture an institution if it is strong enough. I think Americans will never go for it because it sounds like a left-wing attempt to create a right-wing Frankenstein.

I think this argument will have much more staying power than it is really justified because #1 is so inherently subjective. Explaining the enormous dangers and potential costs of such an institution won't matter if its proponents value #1 highly.

Yet, #1 to me seems the easiest to defeat intellectually. I find I have to teach my 2-year old that "just because someone shows you something, that doesn't make it yours." The lesson is the same for cultural rights activists. Just because I have seen pictures of JFK Jr saluting his father's coffin, doesn't mean I possess any rights to it. The photographer had rights to it (which he took for a profit), he sold those rights to a firm, which sold to another firm, etc. At no point does my having seen it entitle me to ownership, let alone any vague notion of "we" own it.

Be ready, if Mr. Ivey is right and Obama is on board, this may have to find its way into the Freedom Index.

Questions I Must Ask

For elementary and middle school students, only homework grades "that raise a student's average" will be recorded.

Story here. I've been trying to write out the mathematical formula for how this would be accomplished, but I can't figure out where the "average" comes from.

As to the parents who are outraged about this, just ask for your money back and go somewhere else. Oh, wait...

Oh, Baby! Who is to blame?

China's official news agency says that the tainted milk powder crisis "reflected chaotic industry conditions, as well as loopholes in the supervision and management of the industry". Was this horrible act attributable to greedy businessmen who will do anything (including poisoning babies) to make a buck? Hmmmm. Maybe. Is more government oversight the answer? No.

This sad disaster is a result of the incentives present in an institutional context of collective ownership and the presence of a highly regulatory bureaucracy that makes a practice of handing out privileges and restricting competition. In a competitive market of private enterprise, companies that poison babies are out competed by those that don’t poison babies. Market incentives exist to report wrongdoers and for companies to take extensive precautions against contamination all kinds. Protecting customers is a profit maximizing strategy when a firm can capture the benefits of doing so. This does not mean that foods will always be 100% safe in a free market. There is an optimal level of food safety. However, I am sure that the optimal level includes not poisoning your consumers or their babies.

Speaking of things that make you sick...

There have been a lot of scary interventions in the recent past; this one might take the cake.

Banning short selling? Can we ban stocks from going down too? Why don't we just prevent companies from failing while we're at it? Oh wait...

Hat tip: TPS Clevelander Rob Holub

Incredible Statements

From the IndyStar, tell me if there is anything in this story that does not make you sick to your stomach:

The town government has paid lawyers, public relations consultants, city planners and other experts more than $1.2 million over the past 21 months to help it try to annex homes around Geist Reservoir.
...
Town officials said almost all of the expenses came after Geist homeowners last summer rejected Fishers attempt annex them voluntarily.
...

"People should know that barely any of these expenses would have been incurred if the homeowners didn't insist on fighting us," said Bryan Babb, an attorney for Bose McKinney. "It has become a lot more expensive based on what GUO has done."

The legal bill was worth the investment, officials said, because a successful annexation will bring the town millions in property taxes from Geist homeowners for years to come.

It's Called a "Government Granted Monopoly," Betty...

...and it's coming to a financial market near you. This from CNN on Ike:

Tempers are running hot in Cincinnati even as hundreds of energy workers try to get the power back on, WLWT reported.

Resident Betty Ruark told the station she was "really teed off" that houses either side of her had power, but she still needed a generator just to make coffee.

"They're right here a week after you pay your bill to read your cotton-picking meter for next month," she said. "They're threatening to cut you off if you don't pay it, but could they care less that they don't got the electric on. It don't make sense, you know?"

Yes, I do know Betty, and I can't wait to pass it along to the other sectors of our economy. Check out this commentary from Nell Minow:

American International Group (AIG) replaced CEO Martin Sullivan after the company posted losses for two consecutive quarters totaling $13 billion. Sullivan's contract entitled him to about $68 million. His replacement, a board member who served as CEO for three months before the company was taken over by the government, will get as much as $7 million.

The boards of directors approved pay that was completely disconnected to performance. This, after all, is the world of the ultimate oxymoron: the "guaranteed bonus." So we should not be surprised that executives took the money and ran.

I agree wholeheartedly Nell, but fortunately the market forces these businesses out of existence. Oh, wait....

Is there a basic principle of economics that is not being raped and pillaged by policy makers right now?

Interview with John Nash

John Nash, of Nash Equilibrium fame, is interviewed here. I bring it up because it may be of interest to our friends in the school of Austrian Economics. If you skip to 28:00 in the video, he talks about the influence of teachers in his life. He says he only took one course in economics, but it was taught by an Austrian economist who was very influential in his way of thinking.

It is brief, but you may find it interesting that one of the most mathematical economists to ever live drew on a Austrian background.

TPS Welcomes Guest Blogger!

TPS welcomes guest blogger Emily C. Schaeffer. Emily is a Ph.D. candidate at George Mason University. Her fields of interest include applied microeconomics, political economy and urban development. Currently she is working on natural disaster response by public and private bureaucracy.

See her first post here. Her website is here.

Is a Ban on Abortion Consistent with Libertarianism?

This is mostly a pointer to DOL's Tim Shaughnessy's post, where he makes the anti-abortion case for libertarianism (and more to his point, the case for religion). I think this is an interesting topic for libertarians to think about precisely because they do seem to come off overwhelmingly in favor of abortion, and it is the party's official platform. I don't have a firm stance on the issue simply because I can't decide, I seem to agree with whoever is arguing their point at the moment (assuming it is a good point).

I tend to think that the role of government is to offset coercion. Yes, the government makes would-be murderer's worse off when they are denied or discouraged from killing someone else, but that merely offsetts the coercion they were to place on the person who was going to be murdered. To me, it is not clear there is or is not coercion because of the ambiguity in determining the human status of the fetus.

My understanding of the Supreme Court's Roe v. Wade decision was that since pregnancy is a medical condition, and the government has no place knowing what your medical condition is, they cannot punish those who terminate their pregnancy. I get that, and that kind of wording seems on the surface a fairly libertarian take (welcome to disagree). However, the government's knowledge of the existence of a person does not seem to grant others the right to murder them.

Ultimately, I think that libertarian philosophy brings nothing new to the abortion debate and we should justs accept this. If the fetus is a person, then the government has a police role to play. If they are not a person then it's not the business of government to intervene. I think this is a improvement over an entire political party taking a stance on it, which mostly seems to serve as a bundling strategy for political views.

Disagree if you wish. Insightful comments that are respectful to everyone's views are welcome.

Apocalypse Now?

If a picture speaks a thousand words, this one encapsulates the fallacious Marxian theories of historical cycles. What may be worse are the parallels between what is written on the gentleman’s sign above and conventional understanding of the relationship between business failure, the market process, and the role of government.

A market process theory of capitalism necessarily requires that firms that make poor decisions (not to name names…eh.. Lehman Brothers et al) collapse and fail. Failure by some is fully consistent with a well working capitalist system. Losses serve the important role of disciplining agents in the market. Losses indicate that using resources in a particular manner is undesirable to the rest of society and unsustainable in accordance with others’ plans. Sometimes (particularly as a result of distortions in crucial price signals) losses mean that large pockets of mal-investment have occurred and will require liquidation.

The process is painful for employees and those whose assets are tied-up in the mal-investment. Nevertheless, the pain is temporary and limited barring any additional government intervention. Resources are freed up by liquidation to be used in profitable undertakings elsewhere, ultimately fueling economic growth throughout the economy. This is part and parcel to the capitalist system, not the ultimate indication of its demise.

Bailouts, not failures, weaken the overall market order. The bailouts of Fannie, Freddie, and AIG are not only unhelpful in current recessionary period, but ultimately harmful and damaging interventions that impede and cripple the market process. Unprofitable allocations of resources and investments persist. Growth for all is curtailed for the protections of the few. More regulation, greater controls, and more government oversight is the immediate recommendation. However, it is not surprising that giving banks money in times of crisis allows for fewer failures in the short run. Example, here. These interventions produce expectations of future bailouts that lead to more risky and unprofitable behavior in the future. Call me crazy, but if the sign read “AIG’s bailout points to a crippling attenuation of capitalism” I would be inclined to agree, even if it was with the crazy man shouting on the corner.