I would be interesting to hear what people think about the following proposed limitation on Welfare and Unemployment benefits. There is a lot more substantive unintended consequences if you look under the surface. It’s one of those ideas that at first I think I would support and then after thinking it though become more ambivalent.
April 1, 2009
March 23, 2009
Ingrid Newkirk of PETA has just posted her will. It has been quite some time, or perhaps never have I ever read anything so provocative as what she has committed to in her will. It reminds me that arguments frequently fall flat even if they are sound in logic unless they appeal to the reader’s innate sense of empathy. Here are several passages which left my jaw on the floor.
the “meat” of my body, or a portion thereof, be used for a human barbecue…
my skin, or a portion thereof, be removed and made into leather products…
my pointing finger be delivered to Kenneth Feld, owner of Ringling Bros. and Barnum & Bailey Circus, or to a circus museum to stand as the “Greatest Accusation on Earth”…
Although I don’t necessarily argree with much of logic because I start from different axioms, I do find -given her own set of beliefs and axioms- she has created a powerful and persuasive argument. I wish I could find such forceful and shocking arguments for my own worldviews.
March 21, 2009
I know that one of the logical fallacies is improper metaphor including anthropomorphic metaphor, but it struck me that the current upheaval has many of the same characteristics of human grief described in the Kübler-Ross model.
1) Denial: John McCain “The Fundamentals of the economy are strong“, need I say more.
2) Anger: There is fury about AIG bonuses, mortgage lenders, derivatives market makers, you name it.
3) Bargaining: We are taking all sorts of action that I think will only postpone the day of reckoning.
4) “Depression”: Yikes, that double entente is a little too apropos.
March 9, 2009
In my training as an economist, I must admit, studying the Great Depression was barely on my radar. I have for some time wanted to read more about economic history. I found Chistina Romer’s speech to the Brookings Institute delivered today to be very educational in that vein, the essay for which can be read here. Maybe I’m just to much of an economics dork, but I also found the footnotes to be very helpful as well, as they contain many primary sources of scholarship and data I was unaware of. I cannot speak to the degree of bias or lack thereof in the speech, I would assume– given her status in the Obama Administration as one of his economic ad visors– she would hold back views she privately held that are in contrast to those of the Administration in general.
March 8, 2009
Not too long ago I purchased a new laptop from Lenovo specifically the SL300 model. Overall, I have been quite pleased with the laptop. However, it is not without its design flaws. For starters, the top of the laptop is made up of glossy finish can you say dust magnet. the screen is also made of a glossy finish. that LCD screen does not have the best off angle viewing either. The screen is plenty bright though. typical of the Lenovo laptop brand the keyboard is of the best quality. I also feel the laptop is very rugged. I have had in the past another laptop from HP which was not to nearly as strongly built. It ended up dying because of a faulty power connector. I do not think this laptop will wear out before the laptop becomes outdated before the technology has been surpassed by something more modern. in other words I think this laptop will be able to take a licking and keep on ticking. one other aspect of the laptop which I don’t like is the sides of the laptop are beveled inward. at first you would think this would make a laptop seen slimmer but actually what it ends up doing is making it more difficult to plug in peripherals. I also think that if I wanted to replace the DVD drive with a more modern Bluray drive since the bay door is beveled it would be difficult to do this. on a positive note the laptop runs very cool and quiet despite having a relatively fast Core 2 Duo P8400 2.26 GHz processor. it is also relatively light being a 13in. laptop but still having a very functional sized keyboard. I also have rather large hands so I’m sure that for the majority of people the keyboard will be an adequate size.
When I was shopping for the laptop I had considered a very small form factor machine like a netbook. However, I found that these netbooks were simply too small to be able to type on reasonably. Perhaps someone with smaller hands could type on a netbook, but I certainly could not. The issue with the netbooks was not the physical size of the keyboard but rather where my wrists ended up landing, right on the edge of it. I almost think if the netbooks had a pullout wrist extension this would solve the typing problems. I also wanted a laptop that could play streaming HD quality video. I suspect the next generation of netbooks based on the Atom processor will be able to stream HD quality video because they will have a GPU on the same chip as the CPU and an integrated memory controller, and a faster front side bus speed. They should also be able to have much better battery of life in the same form factor because the overall real estate of the main board is promised to be 1/3 the size. This should make for more space for a battery without increasing the overall weight or size considerably. Battery life should also be much improved because on the first generation netbooks the northbridge and south bridge actually be used more power than the processor itself.
March 5, 2009
Recently released Legal Opinions from the DOJ were used to substantiate the violent abuses of the U.S. Constitution. An article in the L.A. Times proposes there should be a bipartisan commission to further investigate to what the impacts were of these legal opinions and what actions were taken on their basis. I suggest that the President, Barack Obama, having taken the oath of office twice requires him to “preserve, protect, and defend the Constitution of the United States”, which includes holding accountable those who commit acts to undermine it.
Many have suggested that the legal opinions crossed many lines in disregard to numerous articles and amendment of the Constitution, including “search and seizure” with regard to warrantless wiretapping, “due process” for so called enemy combatants, “free speech” in reference to gag orders to name a few. Also the evidence that has come out the NSA warrentless wiretaps were issued for journalists with no suspected terrorists connections. Not to mention disregard to the Geneva convention with respect to torture. What is truly disturbing about these opinions is that Goldsmith and Ashcroft were actual the voice of dissent against a much more aggressive “unitary executive” view of legal scholarship espoused by John Yoo, who strikes me as the pawn of Cheney, Wolfowitz, and Rumsfeld.
March 2, 2009
Please visit change-congress.org
It is a petition with teeth to force congress to pass legislation that requires federal elections to be funded through small individual donations and from a central matching fund:
Under this legislation, congressional candidates who raise a threshold number of small-dollar donations would qualify for a chunk of funding—several hundred thousand dollars. If they accept this funding, they can’t raise big-dollar donations. But they can raise contributions up to a certain amount (such as $100 or $250), which would be matched several times over by a central fund. This would create an incentive for politicians to opt into this system and run people-powered campaigns.
March 1, 2009
I want to encourage you to inform yourself with the wisdom of two of America’s best capitalists, Milton Friedman and Warren Buffet.
I recently discovered that Milton Friedman classic, and perhaps more relevant than ever, series “Free to Choose” is now free to watch here.
Warren Buffet’s annual report for Berkshire Hathaway was recently released. If you haven’t read any of the past year’s reports, they are well worth the read. The report clearly lay out a great deal of investing wisdom in easy to understand language. They also frequently contain social commentary with precious wisdom. This year’s report was no exception. If you don’t have time to read the whole thing, I suggest you at least read two sections:
Page 9 heading Finance and Financial Products to the end of page 12
Page 16 heading Derivatives through the first paragraph on page 18
Ryan, recently wrote about the Broken Window Fallacy, and was wondering whether the Administration’s policy of continuing to inject capital into illiquid or potentially insolvent banks is analogous. Although his skepticism is warranted, the current bailouts are different in several respects, but also shares some commonality.
Let’s take the Broken Window example. The winners are the glazier and those transactions downstream of the glazier (multiplier off the glazier new found income). The losers are the storekeeper (he is less well endowed by the cost of a window) and those who would have supplied goods or services to the shopkeeper had he not had to spend it on the window instead (and multiplier effect of therein). Assuming the multiplier effect is the same in both cases, society’s total welfare is reduced by the cost of the broken window. The broken window parable demonstrates that society is always made worse by a coercive or violent act (in other words an asymmetric transaction). By definition such a transaction can not be pareto improving.
So let’s take apart the banking transactions. The banking transactions are more subtle and nuanced. To start, there is significant information asymmetry. The banks have a much better understanding of their capital needs than the government and certainly better than the U.S. citizen. This is one of the reasons for the so called “stress tests”. The government has been injecting capital into the banks by giving cash in exchange for preferred stock. In many ways the preferred stock is equivalent to a high yield coupon bond. The terms of the preferred stock for most of the transactions were 5% dividend payments for the first 5 year followed by 9% thereafter. The preferred stock can be retired by the financial institution after 3 years if it is repaid after raising an equal or greater amount through equity stock offering made in the private sector. The CBO calculated the “subsidy” to the banks that these funds represent. The overall weighted average subsidy was 26%. My understanding of the calculation is that it was a probability of ruin calculation (cost if the bank eventually defaults times the prob. of default) and a present value calculation of the below standard terms of the dividend payments calculated using a discount rate equivalent to that used in commonly traded preferred stock for that company or industry. If you want to read more about these transaction the CBO released an analysis of the TARP here. I consider it to be fairly unbiased and thorough, although somewhat out of date at this point (End of Dec.)
So that’s a lot of background on the nitty gritty, but how can we relate this to the Broken Window. Who would be the victim of the Broken Window in this case. What Ryan had a hard time putting his finger on, and for good reason, is the victim is not a single person, but rather the entirety of American taxpayers. As the analysis of the TARP indicates there is a subsidy rate of approximately 26% of the $350B spent through December, which is $91B. That being said, more TARP funds have been dispersed since December and more will likely be dispersed in the future. One of the key learning from the Broken Window is you must think about the counter-factual or said differently the opportunity cost, consider both costs and benefits.
There are several options as I see them.
- Do Nothing
- Keep propping up banks by buying preferred shares
- Bankruptcy proceedings through receivorship
Doing nothing is potentially cataclysmic as financial intermediation would come to a grinding standstill. In that case the Quantity theory of money (which really should be referred to as a law, as it is a tautology) would predict a severe contraction in the economy.
Buying preferred shares is unequivocally a subsidy to poorly managed banks. The subsidy is at taxpayer expense. This is the prototypical broken window, except the window is already broken, now we are stuck deciding whether or not to fix the broken window. As with the shopkeeper there is good reason to fix the window. The shopkeeper can’t keep running his business with the window broken and if it isn’t fixed it invites looting. Similarly, we can’t have a functioning banking industry without the banks capitalized sufficiently and without the bank intermediation the economy crumbles.
So the question comes down to how to recapitalize the banks. If we continue buying preferred shares, it comes at taxpayer expense. If on the other hand, if the government asserts its right of receivorship and takes control of the banks while Chapter 11 proceedings take place, then it does not come at tax payer expense at all. The losers in this scenario would be the shareholders who would be wiped out. The real advantage of this approach is that banks that currently have to pay interests to creditors would be absolved of these interest payments. This would make it less costly for the banks to raise new capital through equity or debt financing as the banks would now be less leveraged. Not forcing banks through Chapter 11 runs the significant risk of having a lost decade similar to the Japanese economy. On the other hand, we can take the approach that Sweden used to end their banking crisis which “took a pound of flesh” out of stock holders of the banks before injecting new capital. One other argument for the necessity of whipping out the shareholders it to demonstrate to investors that taxpayers will not tolerate the moral hazard induced by allowing shareholders to avoid the downside risk of excess leverage.
See the following NYT article about the Swedish banking crisis. See the following article by Paul Krugman (written 10 yrs previously) about why Japanese banks were so unwilling to receive capital injections (hint, it is not in the interests of shareholders or managers because they only get the potential gains and none of the losses).