Friday, October 31, 2008

Halloween Monster of the Year

Mankiw selected some good Halloween political and economic cartoons in this post. Here's an example:

7th Art: This is Halloween



7th Art: De Gaulle intime (2005)

"De Gaulle intime" (2005) is a documentary about the private life of French general and political leader Charles de Gaulle, based on statements by members of his family.

De Gaulle was a man of the early 20th century, a time when authoritarianism and fascism became the norm across the political spectrum, and the state was seen as the solution to all human problems. De Gaulle, as most political leaders of that time, including FDR, believed that the state should control economic choices. Ordinary people could not be trusted to choose what's best for them.

Sorman describes de Gaulle's political ideas and the problems they created in France in this post (in French). De Gaulle believed for example that the state should direct the economy using central planning and large industrial projects. According to de Gaulle's son Philippe, his father once said that "the French people cannot be trusted; if they are allowed to do things, they will only do what is easy; instead of producing steel beams to make boats, buildings and railways, they will produce key chains, because that is what sells."

A young economist may be shocked by this authoritarian and bizarre statement. After all, we know that central planning doesn't work and we know that it hurts freedom of choice. That's however how government leaders viewed the world back then.

Unfortunately we're seeing some dangerous signs that this kind of ideology is making a comeback. I hope it stays where it should always have been: in the trash heap of history.

Stuff I've Read Today

WSJ: crisis affects college choices.
WSJ on the new swap agreements between the Fed and the Central Banks of Brazil, Mexico, South Korea and Singapore.
WSJ: recovery only in the second half of 2009.
WSJ: the economy is slow, but it's hard to say if it's officially a recession.
WSJ: McCain uses Biden against Obama.
The Economist on Mexico's government war on the drug cartels.
The Economist on the Fed's rate cut and fiscal policy.
Mankiw on how some people in India see the US presidential election.
Hamilton on the risk of deflation.
Hamilton on the weak performance of the GDP and his work with Chauvet. Notice that despite the negative growth in the third quarter, the scenario is for now far from being catastrophic.
Boudreaux: is Obama a socialist?

Thursday, October 30, 2008

7th Art: Jean Gabin Echoes Socrates on Knowledge

The great Jean Gabin echoes Socrates on knowledge in this classic French song (Maintenant je sais): "now I know that one never knows" ("Maintenant, je sais qu'on ne sait jamais").

The first video shows the original French version with subtitles in Portuguese, and the second video shows the English version, both sung by Gabin.

My Interview on the Financial Crisis, in Portuguese

Sachsida asks me about the financial crisis and its effects on Brasil, in this interview in Portuguese aimed primarily at Brazilian readers.

Hyperinflation in Pictures: The Monetary Crisis in Zimbabwe

Here are some pictures from a blog called The Fun Stuff (HT Perry).

Zimbabwe's inflation rate has recently hit more than 231 million % per year! This is what a real monetary crisis looks like:

(1) A restaurant check of more than 1 billion dollars!

(2) Here's how restaurant checks are settled:

(3) Only a few months later, three eggs cost 100 billion dollars...

Other pictures are available here.

Stuff I've Read Today

WSJ: Fed cuts rate to 1%.
WSJ: McCain accuses the LA Times of holding back Obama's video.
WSJ: Calabresi on Obama's "redistribution" Constitution.
The Economist on its presidential endorsements in previous elections.
The Economist on McCain's (small) chances of winning.
The Economist on house prices that keep dropping.
The Economist: Iceland goes to the IMF.
Forbes on the road to Euro-taxes (HT Oliver).
Mankiw on the shared application mortgage (SAM) solution to foreclosures.
Eberstadt on the demographic problems in Russia.
Caplan on DeLong going ballistic.
Perry on the culture of government dependency.

Wednesday, October 29, 2008

LACEA/LAMES: No Visa for Prescott?

Sachsida breaks the news that Nobel Prize winner Prescott won't give a main lecture at the LACEA/LAMES 2008 in Rio due to red tape associated with getting a visa to enter Brazil. Could it be true?

It can be easily confirmed here that the new list of main speakers doesn't show his name anymore:
James Powell (University of California, Berkeley)
Matthew Rabin (University of California Berkeley)
This post by Costa however has the old list, which showed his name:

Rohini Pande (Harvard U)
Edward Prescott (Arizona State U and FED Minneapolis)
Matthew Rabin (UC Berkeley)

Well, it's clear that, whatever may be the reason, he'll not attend the conference anymore.

Tuesday, October 28, 2008

Shiff Predicted a Financial Crisis in 2006

Ron Paul's 2008 campaign advisor Schiff predicted a coming financial crisis during a heated debate with Laffer on CNBC's Kudlow & Company in August 2006 (HT Constantino):

Stuff I've Read Today

WSJ: candidates' focus is on the economy.
WSJ on the Fed's coming interest rate cut.
WSJ: Laffer on the end of the age of prosperity.
Becker and Posner on the Milton Friedman Institute.
Mankiw on promoting Bernanke's classic book on the Great Depression.
Mankiw: Summers on the now gone wealth gains by the superrich.
Perry: dollar hits a 30-month high.
Constantino on the Latin-American patrimonialist political heritage and how it hinders regional development (in Portuguese).

Monday, October 27, 2008

Government Failure: Orphanides Criticizes GSEs

In a lucid analysis reported by the WSJ, Orphanides criticizes mortgage government sponsored enterprises (GSEs) for their role in the financial crisis and reminds us that the Senate didn't heed Fed's warnings put forward by Greenspan on the mounting mortgage problems created by government policies:

Mr Greenspan foresaw the problems in Senate testimony as early as April 2005, says Mr Orphanides, highlighting the then-Fed chairman’s warning that: “We at the Federal Reserve remain concerned about the growth and magnitude of the mortgage portfolios of the GSEs, which concentrate interest rate risk and prepayment risk at these two institutions and makes our financial system dependent on their ability to manage these risks. … To fend off possible future systemic difficulties, which we assess as likely if GSE expansion continues unabated, preventive actions are required sooner rather than later.”

But, Mr. Orphanides says, “warnings of the problem were not heeded, and the systemic failure that had been a source of concern at the Federal Reserve materialized.”

In his analysis, Orphanides cites this paper by Calomiris.

Stuff I've Read Today

WSJ: crisis hits the Persian Gulf countries.
WSJ on health care wishful thinking.
WSJ on the effect of the crisis on inequality of wealth.
WSJ on the candidates and your money.
WSJ on how Obama's advisers were once supporters of McCain's health care principles.
WSJ: economists find evidence that DST (daylight savings time) not only is an annoyance but also increases residential electricity demand and pollution.
The Economist on the stock market slump.
Mankiw on economists' sins.
Mankiw explains why Obama's tax policies will make him wish to work less.
Mankiw on the Great Depression.
Kling explains the strength of the dollar (tallest among pygmies).
Caplan on The Onion, Bush and Harding.
Perry: foreclosures drop without AZ, CA, FL and NV.
Somin on Ayers' sudden love for property rights (HT Shikida).
Sorman on Argentina's collective suicide (in French).
Sorman on Sarkozy's "reform capitalism" rhetoric.

7th Art: Wait Until Dark (1967)

"Wait Until Dark" (1967) is a movie directed by Terence Young with Audrey Hepburn, Alan Arkin, Richard Crenna and Efrem Zimbalist Jr, with musical score by Henry Mancini.

Beautiful Audrey Hepburn convincingly plays a blind woman that's involuntarily caught into an elaborate game played by thugs looking for a heroin filled doll. The movie is full of twists and turns that will please fans of Hitchcockian thrillers.

In the trailer below, notice the droll warning about smoking during the movie!

Friday, October 24, 2008

Is Happiness Related to Political Views?

Apparently the answer is yes, according to this WSJ article based on a Pew Research Center survey. Here are the numbers:
The result is even more intriguing when one considers that Democrats are doing well while Republicans are going through one of their worst moments in recent political history.

Naturally there's a question of causality here: does being happier make you a Republican or does being a Republican make you happier?

Cosmos: The Lives of the Stars

In another great episode, Sagan goes from the very small to the very large, from atoms to red giants, from nuclear forces to gravity. In it, he poetically declares:
The nitrogen contained in our genes, the calcium in our teeth, the iron in our blood and the carbon in our apple pie were made in the cosmic kitchen that is the star. Our bodies are made up of the particles that constitute the stars. Indeed, in a very profound sense we are children of the stars.

Stuff I've Read Today

WSJ: Chamber of Commerce supports GOP candidates.
WSJ: Rove on politics and Obama's tax plan.
WSJ on lawmakers and loans.
WSJ on Greenspan grilling.
WSJ on Greenspan's mea culpa.
The Economist on the troubles with emerging markets.
The Economist on China and the crisis.
Miron defends libertarianism from opportunistic attackers (HT Selva Brasilis).
Mankiw: Helicopter Ben to the rescue!
Caplan on Hoover's bizarre statements.
Freakonomics on the decriminalization of prostitution.
Roberts on Waxman and the ghost of Milton Friedman (a Halloween tale).
Roberts on Greenspan the penitent.

NOVA: Quantum Physics and Parallel Worlds

A nice PBS NOVA episode called "Parallel Worlds, Parallel Lives" talks about the life of Hugh Everett III (presented by his own son, musician Mark Everett).

Everett was the creator of the many-worlds interpretation (MWI) of quantum mechanics, a multiverse (parallel universes) theory.

The show does a great job explaining the quantum physics paradoxes that lead to the theory, although it could have been clearer about its drawbacks, especially its bizarre implications to probability theory.

The demonstrations of the duality of matter experiment and of the Schrödinger's cat thought experiment were well done. Multiverses stories are very popular in sci-fi shows, such as in the Star Trek episode "Mirror, Mirror."

The NOVA episode can be watched online (divided in parts) on YouTube. Here's the preview:

Thursday, October 23, 2008

Stuff I've Read Today

WSJ: turmoil in the currency market.
WSJ: Holtz-Eakin and Goolsbee clash on candidates tax plans.
WSJ on the problems with polls.
WSJ: Fed's balance sheet accumulates junk.
The Economist on the Democratic majority in Congress.
The Economist: US, champion of corporate income tax rates.
The Economist on reactions to the crisis in Asia.
Samuelson: are young voters being played for chumps? (HT Mankiw)
Mankiw on Rawls, Nozick and Joe the plumber.
Kling on economists that think they know it all.
Dubner on academic research on the crisis.

Wednesday, October 22, 2008

China's Exports and the Oil Price

In this paper written with Faria, Mollick and León-Ledesma we tried to explain why oil prices are positively correlated with China's exports, a puzzling observation given that oil is an important input in China.

We postulated that, as a result of elastic labor supply and increasing labor productivity, China's exports lead to higher oil prices and at the same time are less affected by higher oil prices than the exports of China's competitors, meaning that China increases its competitive edge when the price of oil increases.

If the predictions of the model are correct, China's exports could fall more strongly than its competitors' exports during a world recession that is accompanied by falling oil prices, causing further reductions in oil prices. In other words, China's competitive advantage could be reduced when the price of oil falls.

This post by Smith indicates that our article's predictions may be validated soon:

One factor that the oil bulls have repeatedly invoked is demand from China. The figure I have seen oft cited is that Chinese demand will continue to rise at 7.8% per annum. ...

Chinese GDP growth and energy demand has fallen off even though exports are still robust. Thus a fall in exports will lead to a further reduction in growth and energy use. And the growth lever that Ting cites, 5%, is already below the 7%+ that was assumed until recently for China.

Stuff I've Read Today

WSJ: Obama increases lead over McCain.
WSJ on the messy state of the real estate market in California.
WSJ: now the problem with credit cards.
WSJ: economist Rubin argues that Obama is dangerous to economic freedom (Caplan hopes he isn't).
WSJ: China's economic pain is worse than most expected (not to my surprise).
WSJ on high school dropout city champions.
WSJ on why performance reviews stink (and I concur).
WSJ: "Bernanke endorses Obama" by supporting his fiscal stimulus plan.
The Chronicle of Higher Education on college dropouts (HT Selva Brasilis).
Mankiw: fewer and fewer people are paying income tax.
Tabarrok and Levitt on Heckman's bizarre behavior.
Caplan on messianism.
Selgin on "Planet of the Apes" and the bailout (HT Boudreaux).
Perry: dollar keeps climbing.
Sorman on IMF's Strauss Kahn scandal (in French).

Argentina's Government Goes After Private Retirement Funds

Argentina works hard to keep its place among the world's most backward economies.

In an unprecedented move, Argentina's leftist government proposed the take over of all private retirement accounts in the country, under the lame excuse that the government is doing it for the good of the rightful but disowned account holders. The proposal will probably have the approval of Congress.

As expected, the government didn't offer any choice to the owners of the accounts regarding the takeover.

Just imagine if the US government would suddenly and unilaterally decide that all private retirement accounts in the country, such as 401(k)s, IRAs, and employer-sponsored retirement accounts, had become property of the Treasury. Well, that's what's happening in Argentina.

Chilean economist Piñera summarized it well:
José Piñera, a former Chilean cabinet minister who pioneered the privatized pension system and has served as a consultant to many other countries that have implemented it, called the nationalization proposal "just another step in Argentina's 100-year 'road to underdevelopment.'"

Tuesday, October 21, 2008

Stuff I've Read Today

WSJ: Dow surges 400 on signs of credit thaw.
WSJ: Fed's Kroszner says better risk management is needed.
The Economist and the economic slowdown in China.
The Economist on TIPS - Treasury Inflation-Protected Securities.
Mankiw on Clinton's 1993 bactracking on tax cuts for the middle class (when reality weighs in).
Hamilton: recession is knocking at the door.
Hamilton: will we bailout commodity speculators too?

Monday, October 20, 2008

"Capitalism Is Dead" Souvenirs and Merchandise

Here's KAL's cartoon from magazine The Economist (HT Constantino):

Anna Schwartz Gives Lessons to Policymakers, Part II

Cowen disagrees with Schwartz's assessment that I presented in a previous post.

I think he's wrong. I believe all efforts should have been directed to banks that are in good financial shape so they stay in good financial shape. There are many banks that behaved in a conservative manner and would qualify for that kind of decontamination.

That would have avoided a domino effect while reducing asymmetric information and moral hazard problems. Easier said than done, but surely the principle that should have been at the core of any government plan.

I don't believe it's good health policy to hide the effects of a highly contagious disease and let the carriers wander around the healthy. We don't save the flotilla by tying all smaller boats to the Titanic while it's sinking.

PS: Kling makes a similar point in this post.

Stuff I've Read Today

WSJ on the coming liberal supermajority, as it hasn't been seen for many decades.
WSJ: Hollywood faces economic difficulties.
WSJ on governmental interference in bank's operations.
The Economist on presidential polls.
The Economist on the presidential debate.
Becker and Posner: is the goose that laid the golden eggs wounded?
Mankiw on Obama's health plan.
Tabarrok on broker's with hands on their faces.
Kling on Cowen and Black.
Wolfers on economic gangsters.
Boudreaux: another example of economic illiteracy.

Anna Schwartz Gives Lessons to Policymakers

My Money & Banking students may remember that during our last class I postulated that the problem of asymmetric information in financial intermediation was probably the most important component of this financial crisis.

I also suggested that the Treasury's bailout plan made the information problem worse by keeping unhealthy banks afloat. The government is artificially creating a lemon market when it does not allow discrimination between healthy and unhealthy banks to occur via bank failures. Besides the redistributive problems that the bailout plan creates, it endangers the entire economy through planned obfuscation. An exemplary case of government failure.

Top economist Anna Schwartz, has just confirmed my suspicions. Here's what she said in an interview to WSJ's Carney:

[The credit market distrubance] is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. "The Fed," she argues, "has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."

Ms. Schwartz argues [that] ... by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. "They should not be recapitalizing firms that should be shut down."

Rather, "firms that made wrong decisions should fail," she says bluntly. "You shouldn't rescue them. ...

Instead, we've been hearing for most of the past year about "systemic risk" -- the notion that allowing one firm to fail will cause a cascade that will take down otherwise healthy companies in its wake.

Ms. Schwartz doesn't buy it. "It's very easy when you're a market participant," she notes with a smile, "to claim that you shouldn't shut down a firm that's in really bad straits because everybody else who has lent to it will be injured. Well, if they lent to a firm that they knew was pretty rocky, that's their responsibility. And if they have to be denied repayment of their loans, well, they wished it on themselves. The [government] doesn't have to save them. ... Why should they be worried about the creditors? Creditors are no more worthy of being rescued than ordinary people, who are really innocent of what's been going on."

It takes real guts to let a large, powerful institution go down. But the alternative -- the current credit freeze -- is worse, Ms. Schwartz argues.

... Today's crisis isn't a replay of the problem in the 1930s, but our central bankers have responded by using the tools they should have used then. They are fighting the last war. The result, she argues, has been failure. "I don't see that they've achieved what they should have been trying to achieve. So my verdict on this present Fed leadership is that they have not really done their job."

PS: Mankiw and White agree that those are wise advices.

Why Incandescent Lamps Shouldn't Be Outlawed, Part II

In this post I discussed the subject. This article in the Toronto Star presents academic research that proves the point. The result should not surprise anyone with basic knowledge of physics and economics.

I noticed however that the research created a storm in the green blogosphere. There are so many paranoid posts on the topic that I'll just suggest browsing through this Google search.

Many among the posts that I've read show lack of understanding of basic concepts such as the difference between radiating heat and convection heat.

Although the people who wrote the posts demonstrate lack of expertise in physical and economic phenomena, they truly believe that they have something to say about environmental issues. Another example of Caplanian political irrationality?

Seussical the Musical

We watched this musical adaptation of Dr. Seuss stories today at the UMD campus, it was lots of fun for all ages. Great job Folks!

Saturday, October 18, 2008

Making Access to Stocks Easier to Micro Investors

The Internet continues to be instrumental in the creation of financial and trading tools that allow micro investors to poll funds and enjoy the benefits of scale advantages.

This product by Walmart, ING DIRECT and ShareBuilder appears to have brought access fees and investment requirements to surprisingly low levels (HT Faria).

Could it be a good way to build tiny portfolios when tax-advantaged options (401(k)s, 529s, IRAs, ESAs) are not available, convenient or relevant?

Disclaimer: this is not an endorsement. Investing in stocks is risky. There's no guarantee of positive returns. Make sure that you know your financial goals and the best ways to achieve them before investing.

Friday, October 17, 2008

Sorman's "America at Work"

French writer Sorman has a new article about the United States in the City Journal titled "America at Work." The article offers a refreshingly positive European perspective of the strengths of the country. For example:

In 1820, about ten years before Alexis de Tocqueville made his famous visit to America, a spectacular event took place, though nobody could have known it at the time: U.S. per-capita income overtook that of Western Europe. This stunning fact was revealed only last year, in a new study by the Organisation for Economic Co-operation and Development. The study, conducted by renowned economist Angus Maddison, also showed that the U.S. economy had remained the world leader ever since 1820. ... Prior to the study, American economic preeminence was widely believed to date to 1904. ...

How did a rather small nation, which had no more natural resources than Europe and little in the way of trading activity, overtake Europe economically in 1820? ... The true reason for the American economy’s takeoff was the focus of Tocqueville’s visit: democracy itself. ...

“The American entrepreneur has a passion for the market,” says Keith Blakely, founder and CEO of Nanodynamics, a pioneer in the revolutionary field of nanotechnology. While European fundamental research can sometimes be superior, American innovation is usually first to market. In the American vision, an idea is good only when the market buys it. Again, it’s a democratic view of the purpose of innovation. This explains the unique relationship in the United States between universities and business. ...

Beyond the democratic principle, another engine is at work within these companies, one that existed on a much smaller scale in the early nineteenth century: what Harvard economist Joseph Schumpeter dubbed “creative destruction” in 1942. Schumpeter meant that the new constantly replaces the old and that the
market reallocates resources accordingly. ...

Finally, there is American cultural diversity. ... “A German company is ahead of us in the market,” admits Caine Finnerty, the Nanodynamics fuel-cell expert and a former Englishman. “But we’ll eventually take over while we tackle the subject from all cultural angles with our cosmopolitan team.”

Stuff I've Read Today

WSJ on Senator Government.
WSJ on Fed bluntness.
WSJ on who's getting the vote of the rich (HT Mankiw).
Mankiw shows the strong correlation (probably not spurious) between the volatility index VIX and Obama's Intrade probability of winning.
Tabarrok: DeLong on Bush.
Cowen on the toilet revolution.
Caplan on subprime education.
Caplan on gas delivery.
Boez ridicules opportunistic comparisons between capitalism and communism (HT Boudreaux).
Boudreaux on Stossel's "Pollitically Incorrect Guide to Politics."

Politics, Irrationality and Intolerance

Economist Caplan developed an interesting and promising line of research that explains how politics is mostly driven by irrational choice, while markets are mostly driven by rational choice.

One of the constant dangers in politics is exactly that political irrationality and its exploitation may easily degenerate into political intolerance. This week we had at least two shameful examples right here in Minnesota nice.

In St. Cloud, a man decided to throw dog feces into his neighbor's truck because his neighbor supports McCain (HT Banaian).

In Duluth, three youngsters vandalized a house fence and disrespected a woman because she had a sign in her yard in support of McCain.

Naturally, you can find such examples of politically driven irrationality and intolerance on all sides of the political spectrum. This WSJ article has examples of serious misbehavior by people that dislike Obama.

This universal pattern suggests that the phenomenon is inherent to the political process.

Want to Find the Gas Station with the Lowest Price in Your Neighborhood?

As the WSJ explains, gas prices keep falling.

MSN Autos has a page that allows you to compare gas prices in your neighborhood. Here's the situation in East Duluth today:

It's Almost Ski Time!

It's almost that time of the year, and I'm looking ahead for it. Here's a winter celebration page by Duluth's ski station, Spirit Mountain:

Thursday, October 16, 2008

Publicly Available Information on American Banks

Would you like to know more about the financial health of a bank with which you have an account? A good source of information is iBanknet: is an interactive media property with a focus on Financial Institutions. Each quarter from public regulatory filings dispersed across Federal Banking Agencies, we collect, generate interactive data, and then publish internet-ready content about Banks, Domestic Financial and Bank Holding Companies, Thrifts and Credit Unions.

Stuff I've Read Today

WSJ: Fed's Beige Book shows farming and mining doing fine.
WSJ: forecasts for 3rd quarter GDP showing slight recession.
WSJ: the G8 statement on the financial crisis.
WSJ on Bernanke's speech at the Economic Club of New York.
The Economist on the bailout plan.
The Economist: the effects of the crisis on the heavy industry.
The Economist on the 2008 Nobel Prize in Economics.
The Economist on Wall Street Gekkos.
Hamilton on some encouraging good news about the economy.
Cowen on the importance of economic blogs and on experimental vs. behavioral economics.
Kling on the political economy of the bailout.
Kling on misunderstanding regulation.
Dubner on pirates now and then.
McArdle on how Krugman's predicitions about recessions are almost always off the mark.
McArdle on financial regulation.
Perry on the usual economic nonsense that we get from the press.
Gawker on NYU's Nouriel "Dr. Doom" Roubini's "work hard, party hard" persona (HT Cowen).

Bailout Plan Cartoons by Michael Ramirez

Michael Ramirez, a Pulitzer Prize winner cartoonist, has been producing a stream of fine cartoons on the financial crisis. His cartoons show subtle understanding of economic issues. See them here. Here's one of them:

Stereotyping Friedman's Ideas and the Chicago School of Economics

Freakonomics has a nice article by Diamond and Kashyap explaining the financial crisis. At a certain point they explain why there'll not be another Great Depression, and criticize silly stereotypes of Friedman's ideas and the Chicago School of Economics that are popular in the press:

Elevated financing costs will slow growth. In the Great Depression, one-third of the U.S. banks failed, and the unemployment rate got to 25 percent. The economy is going to be in for a rough period, but the policy actions taken over the last week are going to prevent this type of collapse.

Finally, some journalists find it strange that we and many of our colleagues at the University of Chicago have been advocating bold government action to stop the collapse of the banking industry. We suspect that some of these people would be surprised to learn that Milton Friedman blamed timid and wrong-headed government policy for causing the Great Depression. Friedman was more concerned about monetary policy actions, but he and Anna Schwartz also gave “a prominent place in the sequence during the contraction to successive waves of [bank] failures.”

The importance of preventing a banking-sector implosion has long been appreciated not only at Chicago, but also at other leading business schools and economics departments. This is why there has been such strong support for the equity injections from economists with very different political philosophies. It is too early to tell if the enthusiasm will fade once the details become known of how the administration plan is being implemented.

Boudreaux also criticizes the same uneducated stereotypes:
Milton Friedman championed not unfettered markets, but markets fettered by competition and consumer sovereignty rather than by political diktats. Friedman understood that fetters imposed by government are neither the only nor the best means of keeping markets working well. Indeed, far too often - as Friedman knew - fetters imposed by government turn in practice into crowbars that businesses use to break free of the competitive shackles that oblige them to behave prudently and fairly.

Wednesday, October 15, 2008

Stuff I've Read Today

WSJ: a capitalist manifesto by Judy Shelton (HT Stroup).
WSJ: academic economists say latest changes in the bailout plan are positive. Many challenges remain however. Cochrane thinks it could be much better.
WSJ on Obama and Acorn.
WSJ on high heels.
WSJ: car-finance firms want to be part of the bailout too.
Forbes: no more Vegas on Wall Street (HT Oliver).
Mankiw on silly exercises regarding the effects on the economy of government's party affiliation.
Tabarrok: telepathy is becoming a reality (welcome to Xavier's world).
Cowen on the absence of good economics in the latest version of Obama's economic plan.
Perry: total loans and leases of commercial banks keep rising. Credit crunch, where?
Le Point: the French bailout plan (in French).
Sorman criticizes Gordon Brown's cartelization of British banks - and Krugman for supporting it (in French).

The Bailout Plan Explained

Banktron in action. Click on the image to zoom in (HT Constantino):

Tuesday, October 14, 2008

Cosmos: Travels in Space and Time

This is one of the most intriguing episodes of Carl Sagan's Cosmos. Lots of food for thought: from star charts to relativity to time travel to evolution, never a dull moment. Poetic, stimulating and informative, it's Carl Sagan at his best.

Krugman Wins the Nobel in Economics

Some positive commentary from fellow economists:

Some mixed or negative commentary from fellow economists:

My take: Krugman's contributions to the science of economics as a scholar are extremely important and deserved to win the Nobel. I have taught them in my courses many times.

I ignore however his post-scholar work as a journalist. He didn't win a Nobel for writing articles for a newspaper.

No Money Under the Mattress

Here is a graph from the St. Louis Fed showing the recent behavior of currency in the US (HT Mankiw). No signs of money hoarding.

Stuff I've Read Today

WSJ on the increase in marginal tax rates for low income workers implicit in Obama's tax plan.
WSJ on Dow's all-time record gain.
WSJ: Kimmitt on the risks of protectionism.
WSJ: Kansas City Fed's Hoenig says financial institutions need to do their part.
WSJ on Kashkari's update on the bailout plan.
WSJ: Treasury to buy stakes in banks.
Posner and Becker on ignoring signs of a coming crisis.
Cowen: the world didn't end.
Cowen on the Treasury as a compulsory shareholder.
Kling proposes a "Bank Telethon": lend a hand and help a banker.
Dubner on campaign money and the media.

Monday, October 13, 2008

Government Failure: The Economics of the UMD Smoking Ban

Brooke Naland, a student at UMD, wrote a nice opinion article that appeared recently in the University's Statesman about the campus smoking ban. The article's use of sound economics is commendable. For example:
You may or may not have noticed, but campus doesn't look very pretty in certain parts. Cigarette butts cover the ground in areas where smokers go to smoke, because there's nowhere to dispose of their butts.
She is referring in this segment to the law of unintended consequences. The ban led to an increase in the amount of pollution, exactly the opposite of the intended outcome.

In another segment she says:
I know that in theory people aren't supposed to be smoking here in the first place, but let's face it. Addiction is a strong thing, and people aren't going to quit if they don't want to. That being said, smokers are going to smoke whether or not there's a rule forbidding them to do so. All this smoking ban has really done is to make some campus employees' jobs more difficult because they have to pick up after people who have nowhere to throw their butts away.
She refers here to the benefit-cost analysis of enforcement. As in the case of the Prohibition, enforcement can become a bigger social problem than the problem that it's trying to address. This is a typical example of government failure, where government overregulation leads to inferior social outcomes.

There's more:

... The purpose of making public buildings, and the average 25-foot area surrounding entrances and windows, smoke-free was due to health concerns associated with second-hand smoke.

I am in full support of this idea. However, when you look past the health concern, a person does, in the state of Minnesota, have the right to smoke. After all, it isn't illegal to use tobacco. If the University wants to create designated smoking areas, I certainly won't argue against it. However, making the entire campus smoke-free just doesn't make sense.

We can find two sound economic principles here. First, it makes use of marginal analysis. The previous regulation had yet addressed the problem satisfactorily, therefore additional restrictions should be expected to have marginal costs that are much higher than their marginal benefits.

Second, there is the question of freedom, one of the greatest gifts that humanity can give itself. As wonderfully summarized by Mill:
Each is the proper guardian of his own health, whether bodily, or mental or spiritual. Mankind are greater gainers by suffering each other to live as seems good to themselves, than by compelling each to live as seems good to the rest.
It means that, as long as the smoker is not bothering anybody else, nobody should have the right to interfere with the smoker's choices. Alternatives to this idea can be described in the best case as paternalism and in the worst case as authoritarianism.

Brooke, congratulations for an excellent piece of writing.

Stuff I've Read Today

WSJ: the crisis gets worse.
Mankiw on the list of economists against Obama.
Mankiw on auctioning bank capital.
Mankiw on the new edition of his textbook.
Cowen on the lack of negative results in alternative medicine journals.
Kling criticizes academic economists.
Kling: Vernon Smith on the bailout.
Dubner on a new online music pricing strategy.
Ayres on what caused the financial crisis.

Sunday, October 12, 2008

What Kind of Crisis Is This?

I've been through a few severe economic crises while I lived in Brazil. I remember for example the effects of the Brazilian debt crisis of 1982. For a while, we couldn't afford to have beef in our diet (that was before I became a vegetarian). We had to carpool or take the bus to school or work. Credit went the way of dinosaurs. Many people I knew lost most of their savings due to wrong financial bets.

I've been expecting something similar to be observed during this crisis, given the state of economic chaos portrayed in the news. Reality insists however on showing me a much rosier face.

I'll give a few recent examples. I asked the regional Midwest bank with which I have an account to double one of my credit lines a couple of days ago. The request was approved in less than three minutes. I also know that this bank is in great financial shape.

I went with my family to dine out at one of our favorite restaurants on Saturday, and there was a one hour waiting time to be seated.

Price of gas, heating, international traveling and interest rates are down, so we're having some unexpected budgetary relief.

What kind of crisis is this?

I don't believe that the bailout plan has anything to do with it. It's too soon for it to have produced any real effect on the economy, and for sure it didn't have any positive effect on expectations.

Yes, I know that crackheads, ex-cons and real estate gamblers have lost their credit lines. I know that overpaid yuppies in Wall Street are sweating blood. I know that some CEOs have been able to avoid deserved market discipline with the help of the taxpayer. I know that my retirement accounts are taking a beating. I know that it may get worse before it gets better.

It appears to me however that Mulligan has hit the bull's-eye in this NYT article (HT Mankiw):

Bear with me. I know that most everyone has been saying for a couple of weeks that something has to be done; a banking crisis could quickly become a wider crisis, pulling the rest of us down. For this reason, the Wall Street bailout is supposed to be better than no plan at all.

Too bad this line of thinking is seriously flawed. The non-financial sectors of our economy will not suffer much from even a prolonged banking crisis, because the general economic importance of banks has been highly exaggerated. ...

So, if you are not employed by the financial industry (94 percent of you are not), don’t worry. The current unemployment rate of 6.1 percent is not alarming, and we should reconsider whether it is worth it to spend $700 billion to bring it down to 5.9 percent.

Stuff I've Read Today

WSJ on the stock market in history.
WSJ on the question of incentive pay.
WSJ: where are all the World Bank protestors this year?
FOX: World Bank raided by hackers.
Chinn: campaign economic advisers debate at the University of Wisconsin - Madison.
Stephenson on small business taxation and the problem with Obama's tax plan.
Boudreaux on the true mystery behind the Great Depression.
Levitt on exagerated claims about the current crisis.
Sorman on how McCain will lose the election for not having opposed the bailout plan (in French).

Saturday, October 11, 2008

Economists Offer Sensible Solutions to the Crisis

Here's an article in the WSJ on sound proposals to solve the financial crisis offered by academic economists (HT Mankiw). Many economists have criticized the government's bailout plan as approved by Congress:

Many economists believed that the heart of the government's initial plan to pay $700 billion for toxic assets was aimed at the wrong target. Purchasing mortgage securities from banks wouldn't do anything to kick-start lending and get credit flowing again, they said. Rather, banks would use the proceeds they got from the Treasury to pay off debtors, and those debtors would use the proceeds to buy safe assets.

... Other hitches in the original plan include coming up with a price for mortgage securities that is above the "fire sale" level they would draw on the open market, but not so high that taxpayers end up getting taken for a ride.

Academic economists came out with much wiser proposals, in the hope that government will be hearing. Here is an interesting idea by Mankiw, which would preserve the role of free enterprise in the system and avoid the dangers of government failure:

The economists came from different schools of thought and varying political stripes but all agreed that recapitalizing banks was a key initiative. ...

Harvard University economist Gregory Mankiw, former chairman of the Council Economic Advisors under President George W. Bush, suggested that the government could set up a recapitalization plan that works like a matching grant. If a financial institution attracted new capital from private investors, it would be able to access an equal amount of government capital.

"The private sector rather than the government would weed out the zombie firms," he wrote on his blog. "The private sector rather than the government would set the price. And the private sector rather than the government would exercise corporate control."

And here is DeLong on how to stimulate the economy:

A final step toward stabilizing the economy would be a large economic stimulus plan, said Berkeley economist Brad DeLong. He suggests that in the U.S. this could be two-tiered, with half the stimulus going toward a tax rebate and the other half dedicated to infrastructure spending.

Mr. DeLong said he is encouraged by how quickly economists' thoughts on the crisis have made it into the public sphere.

7th Art: Les choses de la vie (1970)

"Les choses de la vie" ("The Things of Life," 1970) is a subjective drama directed by Claude Sautet with Michel Piccoli and Romy Schneider. A story about a man facing hard personal choices and how the choices become irrelevant once accident strikes. The car crash scene is remarkable, one of the most beautifully done in the history of cinema. The depiction of the semi-consciousness and near-death experience is highly convincing and written with much artistic grace. This is unquestionably an excellent movie.

Stuff I've Read Today

WSJ: a bad week for the Dow.
WSJ: McCain calls for suspension of forced sale rule on retirement accounts.
The Economist: IMF says the global recession is coming.
The Economist on the markets' downturn.
The Economist on kids, junk food, video games and TV.
The Economist on how ex-communist countries should stop aiming for the lowest Western moral standards.
Mankiw on Blanchard and the lessons from the Great Depression.
Boudreaux on why he's not inviting some politicians to talk about economics in his Department.

Friday, October 10, 2008

Stuff I've Read Today

WSJ: Fed on the liquidity facilities.
WSJ on the Dow under 9000.
WSJ on the candidates to the Nobel Prize in Economics.
WSJ: Rove on the election.
WSJ on Schwarzenegger and California.
The Economist on the synchronized rate cut by world Central Banks.
The Economist on the crisis around the world.
The Economist on the bailout of banks in the UK.
Cowen on the problem with partially nationalized banks.
Cowen on goods with countercyclical demand.
Cowen on the candidates to the Nobel Prize in Economics.
Boudreux: should we redistribute wealth, then why not redistribute power too?
Perry on the rising incomes since 2001.
Perry: top 1% of taxpayers pay more federal income taxes (in value) than entire bottom 95%.

Do Top Journals Have a Tendency to Publish Headline-Grabbing but Wrong Research?

This article in the magazine The Economist talks about research by Ioannidis that suggests that a large part of highly cited research published in leading journals is refuted only a few years later:
Dr Ioannidis based his earlier argument about incorrect research partly on a study of 49 papers in leading journals that had been cited by more than 1,000 other scientists. They were, in other words, well-regarded research. But he found that, within only a few years, almost a third of the papers had been refuted by other studies. ...
In a more recent article he and his coauthors argue that research published in trendy fields and top journals appears to be more prone to error:

... Dr Ioannidis and his colleagues argue that the reputations of the journals are pumped up by an artificial scarcity of the kind that keeps diamonds expensive. And such a scarcity, they suggest, can make it more likely that the leading journals will publish dramatic, but what may ultimately turn out to be incorrect, research. ...

The group’s more general argument is that scientific research is so difficult—the sample sizes must be big and the analysis rigorous—that most research may end up being wrong. And the “hotter” the field, the greater the competition is and the more likely it is that published research in top journals could be wrong.

Thursday, October 9, 2008

Stuff I've Read Today

WSJ: synchronized rate cuts by Central Banks around the world.
WSJ on the next Fed rate cut.
WSJ on the radical course change of the ECB.
Mankiw on the recapitalization of the financial system.
Dubner on the book "The Price of Everything" by Roberts.
Caplan criticizes Congressman Frank.
Kling on the awful presidential debate, a festival of economic obscurantism.
Perry on the silliness of the "energy independence" mantra. Why not to become "banana independent" too?
Perry: should we give a medal to speculators for decreasing gas prices? Or should we blame them?
Stephenson on how the bailout plan is "reverse Darwinism."

Government Failure: Ohanian on How the Great Depression Was Not Caused by a Financial Crisis

In this important article in the WSJ, Ohanian alerts for misguided comparisons between the Great Depression and the current financial crisis (HT Mankiw). He explains how the popular historical interpretation that the Great Depression was caused by a financial crisis is wrong:

President Bush argued that the passage of the Treasury rescue plan was necessary to prevent the U.S. from entering a severe downturn. Yesterday, the Federal Reserve announced it will begin buying commercial paper ... Unfortunately, [these measures] have created considerable fear about the underlying strength of the U.S. economy. This panic has roiled stock markets and led to comparisons between today's crisis and the Great Depression of the 1930s. ... This is based on the very common misperception that the banking crises of the 1930s helped turn a garden variety recession into the Great Depression.

Banking panics did not create the Great Depression, nor did the elimination of panics via the introduction of deposit insurance generate economic recovery. The first banking crisis of any national significance didn't occur until the fall of 1931. ... However, the Great Depression was already "great" at this point -- industrial production and employment had fallen by more than 35%. The genesis of the Great Depression was not a banking crisis.

He then reminds us that misguided governmental responses based on populist politics aggravated the crisis and produced the Great Depression. This was one of the most important cases of government failure in the history of the US:
There are many historical precedents of bad policies following crises. The worst case was after the stock-market crash in October 1929, which produced a truly perfect storm of bad policies. Tax rates rose, tariffs rose (reflecting special interest groups attempting to insulate domestic producers from foreign competition), and both Presidents Herbert Hoover and Franklin Roosevelt strongly promoted industry-labor cartels that were designed to stifle domestic competition.

In the absence of these policies, the Great Depression would almost certainly have been like every other U.S. recession -- short-lived and relatively mild. Normal recovery didn't begin until the most onerous of these policies were reversed, a process that didn't begin until the end of the 1930s when antitrust activity was resumed, and during World War II when the National War Labor Board reduced union bargaining power by limiting negotiated wage increases to cost-of-living adjustments only.
Among possible responses based on solid economic principles he proposes "lower tax rates and more skilled immigrants":

We should encourage the immigration of prime-age individuals. ... Increasing immigration would increase the demand for housing and raise home prices. And note that the benefit would be immediate. Home prices -- and the value of subprime obligations -- would rise in anticipation of a higher population base. The U.S. particularly needs highly skilled workers. These workers not only would purchase homes, but would generate higher living standards for all Americans.

PS: Chinn criticizes Ohanian arguments here.

Wednesday, October 8, 2008

Stuff I've Read Today

WSJ: top economist Becker explains why we're not headed for a depression.
WSJ on the fall of the Dow.
WSJ: as the economy goes down, Obama goes up.
WSJ: Americans borrow less. Is this good or bad news?
Roberts thinks about not voting this time.
Roberts on how the bailout plan gives money to GM.
Stephenson: Bernanke acknowledges stagflation.
Perry: Liebowitz article on the causes of the mortgage meltdown.
Sachsida explains the latest case of abuse of executive power in Brazil (in Portuguese).

Fed Chairman Bernanke's Financial Crisis Speech

He addresses among other topics the problems created by badly designed economic incentives in our mortgage system. Here are some among the main points in his speech:
... On the heels of nearly a year of stress in credit markets, investors’ and creditors’ concerns about funding and credit risks at financial firms intensified over the summer as mortgage-related assets deteriorated further, economic growth slowed, and uncertainty about the economic outlook increased. As investors and creditors lost confidence in the ability of certain firms to meet their obligations, their access to capital markets as well as to short-term funding markets became increasingly impaired and their stock prices fell sharply. ...

The Federal Reserve believes that, whenever possible, such difficulties should be addressed through private-sector arrangements ... Government assistance should be provided with the greatest reluctance and only when the stability of the financial system, and thus the health of the broader economy, is at risk. In those cases when financial stability is threatened, however, intervention to protect the public interest may well be justified.

Fannie Mae and Freddie Mac present cases in point. The Federal Reserve had long warned about the systemic risks posed by these companies’ large portfolios of mortgages and mortgage-backed securities, as well as the problems arising from the conflict between shareholders’ objectives and the government’s goals for the two firms. ...

... Equity prices have fallen sharply, the cost of short-term credit, where such credit has been available, has spiked, and liquidity has dried up in many markets. ... At the same time, a marked increase in the demand for safe assets–a flight to quality and liquidity–resulted in a further drop in the value of mortgage-related assets and sent the yield on Treasury bills down to a few hundredths of a percent.

All told, economic activity is likely to be subdued during the remainder of this year and into next year. The heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance and further increase the risks to growth. To support growth and reduce the downside risks, continued efforts to stabilize the financial markets are essential. The Federal Reserve will continue to use the tools at its disposal to improve market functioning and liquidity.

Inflation has been elevated ... . However, more recently, the prices of oil and other commodities, while remaining quite volatile, have fallen from their peaks, and prices of imports show signs of decelerating. ... Still, the inflation outlook remains highly uncertain, in part because of the extraordinary volatility of commodity prices. We will need to continue to monitor price developments closely.

Overall, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased. At the same time, the outlook for inflation has improved somewhat, though it remains uncertain. In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate.

... The Secretary of the Treasury, with the support of the Federal Reserve, went to the Congress to ask for a substantial program aimed at stabilizing our financial markets. ... Notably, the legislation establishes a new Troubled Asset Relief Program, or TARP, under which the Treasury is authorized to purchase as much as $700billion of troubled mortgages, mortgage-related securities, and other financial instruments from financial firms that are regulated under U.S. law and have significant operations in the United States. The act also raises the limit on deposit insurance at banks and credit unions from $100,000 to $250,000 per account, a step that should reinforce depositors’ confidence in the security of their funds and thus help to stabilize depository institutions. And, as I mentioned, the act provides the Federal Reserve the authority to pay interest on reserves, which will allow us to better manage the federal funds rate as we provide liquidity to the markets. We will begin exercising that authority this week.

... I believe that the bold actions taken by the Congress, the Treasury, the Federal Reserve, and other agencies, together with the natural recuperative powers of the financial markets, will lay the groundwork for financial and economic recovery.

Tuesday, October 7, 2008

The Financial Crisis Job Market

With or without bailout plan...

Stuff I've Read Today

WSJ: Dow drops below 10,000.
WSJ on Biden's gaffes.
WSJ: Fed tries to resolve Wachovia dispute.
Washington Post: Mallaby on deregulation (HT Mankiw).
The Economist on banking troubles in Europe.
The Economist on the financial problems in Hong Kong.
The Economist on the TARP.
The Economist on the real side of the economy.
Becker on government equity in private companies.
Posner on equities, pay caps, etc.
Cowen on the effects of free markets on moral character.
Kling on Harvard graduates, intellectual arrogance, and playing with other people's money.
Dubner asks: is voting dangerous for your health?
McArdle on mark-to-market accounting.