The Efficient Markets Hypothesis

by on August 24, 2016 at 7:35 am in Economics | Permalink

In the first video in the Personal Finance section of our Principles of Macroeconomics course we pointed out that mutual fund managers do not beat the market on average. Why is this? In the second video, we take a look at the efficient markets hypothesis.

I’m rather fond of this video as it has some good story-telling elements, features Einstein in an important cameo (do you know why?) and yet also covers important ideas in an intuitive yet deep way.

The Return of Glass-Steagall???

by on August 24, 2016 at 7:25 am in Economics, Law | Permalink

The Atlantic writes:

Hillary Clinton and Donald Trump, have included plans to reintroduce the [Glass-Steagall] bill in their economic platforms. The argument for the act is that it could have prevented (or at least dampened) the 2008 financial crisis, and that reinstating it could ward off future ones. Is that the case?

The Atlantic’s editors reached out to economists and experts in financial regulation to ask them why Glass-Steagall is seeing renewed popularity right now, and what they think would make America’s financial system safer in the future.

Here’s part of what I had to say:

When Black Lives Matter calls for a restoration of the Glass-Steagall Act we know that the Act has exited the realm of policy and entered that of mythology. No, restoring the Glass-Steagall Act would not end racism. Nor would restoring Glass-Steagall have done much, if anything, to have avoided the 2008-2009 financial crisis. Secretary of the Treasury Timothy Geithner was correct when he said the problems at the heart of the financial crisis had “nothing to do with Glass-Steagall.”

The financial crisis is best understood as a run on the shadow banking system, that collection of financial intermediaries who based their credit creation not on deposits but on repo, money market funds, structured investment vehicles, asset-backed securitizations and other financial structures. Separate commercial and investment banking? Please. The problem was that by 2007 the shadow banking system had become so separated from commercial banking that the Federal Reserve didn’t know that a majority of credit was being generated by the shadow banks.

…“Nothing has been done!” may play well in some quarters but the Obama administration has in fact imposed systematic reform on the financial system. Most importantly, capital requirements have been increased (leverage has been reduced), forcing financial intermediaries to have greater skin in the game and to provide a cushion in the event of a fall in asset prices. Moreover, capital requirements have been extended far into the shadow banking system. Most recently, the Fed has imposed a capital surcharge on the biggest institutions i.e. the too big to fail institutions.

…Ironically, despite the political power of the financial sector it seems that more has been done to raise bank capital ratios than to require homeowners to raise their capital ratios by requiring larger down payments. There is a lesson there.

Robert Reich, Sheila Blair, Lawrence White, Stephen G. Cecchetti and others also comment. Only Reich, with some support from Blair, is enthusiastic.

How many who think we should subsidize manufacturing also think high corporate tax rates are harmless?

That is from Modeled Behavior.

This is perhaps the best and most instructive one I have heard:

…Mr Xi’s authority remains hemmed in. True, his position at the highest level looks secure. But among the next layer of the elite, he has surprisingly few backers. Victor Shih of the University of California, San Diego, has tracked the various job-related and personal connections between the 205 full members of the party’s Central Committee, which embodies the broader elite. The body rubber-stamps Mr Xi’s decisions (there have been no recent rumours of open dissent within it). But the president needs enthusiastic support, as well as just a show of hands, to get his policies—such as badly needed economic reforms—implemented. According to Mr Shih, the president’s faction accounts for just 6% of the group.

That is from The Economist.  Along related but not identical lines, here is a good story of the weak control of the Chinese central government:

Through July, claimed capacity reductions were less than half the target for the year (and less than 40% of the target for coal capacity reduction).  Some provinces were reported by the NDRC to have achieved only 10% of their annual targeted cuts.

…This resistance has led to more and more shrill directions from Beijing to act on instructions.  Now Beijing is sending out 10 inspection teams across the country to check on claimed capacity removal and to require follow through on additional closures.  I have one suggestion for them: The only way to ensure a closed plant remains closed is to physically destroy or remove key pieces of equipment.  Otherwise don’t be surprised when it starts back up again.

Don’t forget this:

Many steel mills are the key employer and tax payer in their city. In boom times, they might have provided as much as 30% of the tax revenue for local government.  Workers from the steel mill were at the forefront of buying property in the town, creating a positive cycle of additional demand for housing and steel.  If these workers are now laid off, even with one-time transfers from the center, local government faces an enormous challenge in trying to find new jobs for people who have been in a steel mill all their life.  They can’t all become part-time Uber/Didi drivers. Many government officials see delay as the most logical course of action.

That is from Gordon Orr.

Hong Kong’s streets are safer, with fewer murders by the fierce crime organizations known as triads that figured in so many kung fu films. And its real estate is among the world’s most expensive, making it difficult for training studios to afford soaring rents.

Gone are the days when “kung fu was a big part of people’s cultural and leisure life,” said Mak King Sang Ricardo, the author of a history of martial arts in Hong Kong. “After work, people would go to martial arts schools, where they’d cook dinner together and practice kung fu until 11 at night.”

With a shift in martial arts preferences, the rise of video games — more teenagers play Pokémon Go in parks here than practice a roundhouse kick — and a perception among young people that kung fu just isn’t cool, longtime martial artists worry that kung fu’s future is bleak.

High studio rents are of course a big problem:

…According to Mr. Leung’s organization, the International WingTsun Association, former apprentices have opened 4,000 branches in more than 65 countries, but only five in Hong Kong…

“Kung fu is more for retired uncles and grandpas.”

That is from Charlotte Yang at the NYT, interesting throughout and yet I hear the author is only a summer intern.

Tuesday assorted links

by on August 23, 2016 at 12:10 pm in Uncategorized | Permalink

I’ve been hearing plenty of calls for a higher inflation target, perhaps four percent.  I do understand the case for this, and furthermore it is not obvious that the higher rate of inflation would bring significant social costs.

The thing is this: whether rationally or not, the American public hates higher rates of price inflation.  Perhaps they mis-sample or mis-estimate prices, or perhaps the higher prices really do erode their real wages in a way they can’t get back through a new labor market bargain.

So a higher price inflation target would mean that everybody would hate the central bank.  It would not shock me if the first thing they did was to dismantle…the higher price inflation target.

Under nominal gdp targeting, the rate of price inflation would not have to significantly rise until worse times were upon us.  That is precisely when such upward price pressures would be most useful.

In 2015 our iron ore exports alone were four times the value of all of our combined services exports to China. And in services the only things that really count are tourism and education. That’s not going to change for a long, long time.

The alas now gated article, by Greg Sheridan, is of interest more generally and concerns some myths about China and Australia.

Addendum: To read the piece, try here.

No, this is not a repeat of the post from yesterday, there is another twist:

Doctors in Belgium have rejected an imprisoned murderer and rapist’s request for medically assisted suicide, the Justice Ministry said on Tuesday, less than a week before he was due to receive a lethal injection.

…Van Den Bleeken, 51, and in prison for nearly 30 years, had complained of a lack of therapy provided for his condition in Belgium. He argued he had no prospect of release since he could not overcome his violent sexual impulses, and wanted to die in order to end his mental anguish.

Belgium has pioneered the legalization of euthanasia beyond terminal illness to include those suffering unbearable mental pain.

But others have received euthanasia:

Cases which attracted international attention included the euthanasia of two deaf twins who were in the process of losing their sight, and of a transgender person left in torment by an unsuccessful sex change operation.

In February, Belgium became the first country to allow euthanasia for terminally ill children at any age, a move which drew criticism from religious groups both at home and abroad, though application for minors is limited to those about to die.

It is perhaps the wrong mood affiliation to apply the euthanasia process to an actual criminal:

Belgium, like the rest of the European Union, does not have the death penalty.

Here is the full article, and for the pointer I thank A. Le Roy.

Monday assorted links

by on August 22, 2016 at 1:26 pm in Uncategorized | Permalink

New MRU Course: Money Skills!

by on August 22, 2016 at 7:23 am in Economics, Film | Permalink

We have a new course at Marginal Revolution UniversityMoney Skills. The first set of videos overlap with our Principles of Macroeconomics course and cover things like lessons from economics for investing in the stock market. We also cover this important material in our textbook, Modern Principles. Later videos will cover time discounting (mortgages), career choice, renting versus owning and other topics depending on demand.

Here’s our first video, How Expert Are Expert Stock Pickers? Later in the week, Tyler will cover the theory of efficient markets.

Demand curves do slope downwards:

Euthanasia tourists are flocking to Brussels to get a lethal dose. Doctors at hospitals and clinics at Belgium’s capital are seeing an increase in number of euthanasia tourists who are travelling from across the world to their accident and emergency rooms.

As elective medical killings are illegal in France, French patients are often arriving with suitcases. They believe that their request to die will be carried out within a week.

In 2015, a whopping 2,023 people were medically killed in Belgium. The number has more than doubled in five years. According to Olivier Vermylen, an emergency doctor at Brugmann University hospital, seven out of 15 euthanasia cases involved French people.

“It’s a phenomenon that did not exist five or six years ago. Nowadays I get phone calls about French people who arrive in the emergency room announcing that they want euthanasia,” Vermylen told Belgium’s Sudpresse newspaper, reports The Times.

Even at the Jules Bordet institute in Brussels, almost a third of euthanasia consultations, that is 40 out of 130 cases, are by French people. One of the primary reasons why people choose to get euthanized in Belgium is the cost.

Euthanasia in Switzerland costs €4,000 (AU$5,935), writes The Australian. However, euthanasia in Belgium is usually free as the treatment is covered by the European Union’s health insurance card. The bills are sent to French healthcare providers.

And here is a person who needs that extra dose of media training:

“Of course, Belgium is not here to euthanize half the planet. I can understand those who say that France should look after its own patients. But this is easy to say in the office. When you have a patient who is suffering in front of you, you don’t think of that. You help – whether they are French or not,” said Brugmann University hospital’s Michele Morret-Rauis.

I am sorry people, but in light of that state-dependent utility function known as “life or death,” if it ever came to such a point I would opt for Switzerland.

Here is the article, via the excellent T. Hynes.

A few of you have asked, I considered that question in 2012, here is a significantly revised update:

1. Now I know how to text, sort of, though I hardly ever do it.  It strikes me as the worst and most inefficient technology of communication ever invented (seriously).  It’s not that fast, and it’s broken up into tiny bits of back and forth.  I don’t see how it makes sense beyond the “What should I get at the supermarket? — Blueberries” level.  There is intertemporal substitution, so just, at some other point in time, spend more time talking, writing longer letters, making love, whatever.  Not texting.  It is never the best thing to be doing, except to answer some very well-defined question.

2. I now carry only one iPad around, as I donated my spare iPad to a poor Mexican family.  I use it very often for directions, book and restaurant reviews, and general life advice.  Plus email and keeping current on my Twitter feed.  I simply don’t want a screen any smaller than that.  My iPad now also has a rather pronounced crack on the front glass, but that adds to its artistic value.  I dare not drop it again.

3. I have an iPhone, which I hardly ever use for anything.  Occasionally someone calls me on it, or I use it to check email in situations when it might be rude to pull out the iPad.  Other times I am rude, but it’s actually a form of flattery if I am willing to check my iPad in front of you.  You may not feel flattered, however.

3b. Except for the occasional Uber ride, I don”t use apps and hate reading news sites through the apps, I won’t do it.  I’m used to the web, not your app, and I hope I can get away with being a stubborn grouch on this forever.

4. I now have a Bloomberg terminal, which is very cool.  It is amazing that a product designed in the “before the internet as we know it” era still is the clear market leader and the best option.  Bloomberg is a great company with a great product(s).  Right now I can do about 5 of the 25,000 separate commands, but the fault is mine not theirs.  In the meantime, send me email at my gmu address, not what is listed on the Bloomberg column.

5. I use my Kindle less over time.  It remains in that nebulous “fine” category, but I prefer “real books.”  Kindle is best for works of fiction when I know in advance I wish to read every page in the proper order.  I am continuing with my long-range plan to read Calvin’s Institutes on my Kindle, bit by bit, in between other works.  This will take me ten years, but a) he is a brilliant mind, and b) in the meantime I won’t lose sight of the plot line.

6. I have a new Lenovo laptop, sleek and fast, plus some computers at work.  I don’t even know what they are, but probably they are quite subpar.

Way more iPad and way less texting are I suppose the main ways in which I deviate from the dominant status quo.  Come join me in this and we shall conquer the world.

Sunday assorted links

by on August 21, 2016 at 12:50 pm in Uncategorized | Permalink

Uber passengers in Pittsburgh will be able to summon rides in self-driving cars with the touch of a smartphone button in the next several weeks. Uber also announced that it is acquiring a self-driving startup called Otto, co-founded by Israeli Lior Ron, that has developed technology allowing big rigs to drive themselves.

Via Mark Thorson, here is more.  And in Finland:

Residents of Helsinki, Finland will soon be used to the sight of buses with no drivers roaming the city streets. One of the world’s first autonomous bus pilot programs has begun in the Hernesaari district, and will run through mid-September.

Finnish law does not require vehicles on the road to have a driver, making it the perfect place to get permission to test the Easymile EZ-10 electric mini-buses.

So perhaps Finland can become a market leader in this area.