Month: March 2008

My podcast on macro and monetary policy

It is with Russ Roberts and it covers the roots of our current crisis, why things are far more troublesome than most people expected (and that is the really tough question; real estate bubbles have burst before), why monetary policy matters at all, the tricky balancing act played by the Fed, why a gold standard isn’t the answer, and many other macroeconomic topics.  My core attitude, in case you don’t already know it, is that monetary policy is both an art and a science and there are no secret ways of getting it right, understood by only a few.  The podcast is here

Addendum: Arnold Kling summarizes.

Surely you all wondered the same

Not all investors are expected to be pleased with the deal. A
conference call with investors and analysts on Sunday night was broken
up when a Bear Stearns shareholder sought an explanation of why he
would be better off approving this transaction rather than seeing Bear
Stearns file for a Chapter 11 bankruptcy.

The JPMorgan executives
demurred, instead referring the investor to Bear Stearns executives for
an explanation. The shareholder declared that he would vote against the

Afterward, Mr. Cavanaugh said JPMorgan felt comfortable in
pulling the trigger despite the short due-diligence process. “We’ve
known Bear Stearns for a long time,” Mr. Cavanaugh said.

Vis-a-vis that last sentence, last year the stock price was $170, late Friday it was $30 a share, yesterday the deal was done at about $2.  Here is the story.  From published accounts, the nature and extent of the Fed and Treasury obligations is not yet clear.

Common Wealth: Economics for a Crowded Planet

That’s the new Jeff Sachs book.  It promotes resource pessimism, Nordic-style social democracy, foreign aid, and a fundamental rethinking of U.S. foreign policy.  Most of all it expresses a faith in global cooperation.  Sachs is very smart and, though I do not agree with him, there is often more to his views than his critics admit.  But my browsing of this book never gave me the feeling that I had access to the mind of Jeffrey Sachs.  It doesn’t even read like a popularization.  Imagine a smart and diligent but not insightful or self-reflective person doing a "color by numbers" version of what a Jeffrey Sachs book should read like.


Suppose that Monday morning, Ben Bernanke is presented with a deal,
under which a buyer gets Bear assets on the cheap, Bear stockholders
get paid out, and the Fed (implicitly or explicitly) bears residual
risk. If the Fed doesn’t approve, executives say, Bear will file for
bankruptcy. Dr. Bernanke will then have an unappetizing choice. He can
say yes, and hope that there aren’t any more rumors out there about any
other firms. Or he can say no, and make it very clear that if Bear
Stearns files for bankruptcy despite the Fed’s continuing provision of
liquidity, he will do everything in his power to hold Bear executives
personally responsible for the crisis that results.

Who do you think has more bargaining power in this game?  The firm with the reputation for obnoxiousness and recklessness, or a charming, intelligent and indeed gentlemanly central banker?  We may know soon enough.  Here is more, and here, and don’t forget this.  Here is a news report, if you are interested in the background.

Update: Seems to be a deal…at about $2 a share.  Book value of about $80 a share. 

Cop in the Hood

Motivated primarily by a desire for court overtime pay, police officers want arrests on their own terms, ideally without victims, complaints, or unnecessary paperwork.  Young officers make more arrests than veteran officers.  These officers believe that making arrests is police work.  In my squad, the top three officers in arrest totals were three officers with the least experience.  An arrest-based culture can exist in a low-drug environment, but without a limitless supply of arrestable criminal offenders, an arrest-based culture cannot make a lot of arrests.  Neighborhoods, without public drug dealings will not produce a high number of arrests.

That is from Peter Moskos’s truly excellent Cop in the Hood: My Year Policing Baltimore’s Eastern District.  This is one of the two or three best conceptual analyses of "cops and robbers" I have read.  It is mandatory reading for all fans of The Wire and recommended for everyone else.

How many books should be facing out?

To boost sales, retailer Borders Group is taking a simple but radical approach, our colleague Jeff Trachtenberg reports in today’s Wall Street Journal.
Borders is increasing the number of books that it displays with the
cover facing out (rather than the spine facing out), even though this
shelf-space-eating approach will require cutting inventory at each
store up to 10%. Says one analyst: “Breakfast cereals are not stocked
end-of-box out. […] It’s a little bizarre that it’s taken booksellers
this long to realize that the point of self-service is to make the
product as tempting as possible.”

The link is here.  I understand the basic model as follows.  Superstores first invest in high inventory and a tony reputation.  You start thinking of them as "the place to go" for books, or in an earlier era, for music.  They then devote more and more of their space to non-book items.  The number of greeting cards and chocolates stocked by my Borders has risen steadily over time, as have the size of the coffee shops.  Having more books "face out" — at least they are books — is one of the lesser aspects of this more general problem.  It’s related to why most trendy restaurants peak in the first year and a half of their operation, followed by decline and then stagnation.  Once they have a high enough (and sticky enough) reputation, it is time to cash in and lower the quality of the product to the informed and more sophisticated buyers.

The N word

No, not that N word, the other N word.  Nationalize.  As in nationalize a financial institution here and there.

Do you know how Paul Krugman is following the TED spread as an indicator of current financial troubles?  I’ll be following how many times the N word pops up in Google News.  Right now the top mentions all concern other countries, of course including Northern Rock in Great Britain.  So far this is the closest I’ve found to hints of nationalization for the United States; in the blogosphere Nouriel Roubini is saying nationalization is better than bailouts.

The Swedes, of course, nationalized Nordbanken, their #2 bank at the time, in the early 1990s, during their financial crisis.  They also nationalized Gotabanken and supplied funds to several other institutions.  The belief at the time was that loan liquidation would have been even worse.  And since Nordbanken was on life support anyway, and the government had to limit systematic risk by paying off creditors anyway, why not just control the bank directly?  The bank was subsequently re-privatized.  You’ll find more background on the Swedish experience here.  Of course in these situations none of the options are pretty.  But keep in mind that the Fed (and ultimately, the taxpayer) is already residual claimant on the Bear Stearns deal and then read Mises on the dynamics of interventionism.

There are many things we do not do as well as the Swedes.  In any case, if use of the N word remains spotty or non-existent in the U.S., you’ll know that things are going OK, at least relative to what might have happened.

Addendum: Brad DeLong has much to add, including some policy recommendations.  Arnold Kling doesn’t agree.

Hedge fund wizards

By Dean Foster and H. Peyton Young.  They fear that hedge fund managers can write a series of naked puts with high probabilities of above-average returns and low probabilities of extreme disaster.  Most of the managers will establish track records and attract more funds.  They gain on the upside but don’t lose that much on the downside.  The key problem is that investors judge investors on the basis of observed past performance, not the entire probability distribution they have created.  Yet the latter is what we all end up having to live with.

The prostitution “crackdown” in the Netherlands

Read this for a public choice interpretation, and here are some real Dutch facts.  Here goes:

The real point is real estate. The red light district is in the
oldest, most beautiful area of Amsterdam. In the last 20 years, it has
changed from a mixed neighborhood to one almost exclusively peopled by
the very well to do. They pay a fortune for those apartments and homes.
The talk of cleaning up the neighborhood for the sake of the
prostitutes and to lessen criminal behavior is simply a smokescreen.
What they wish to do is to create a more up-scale neighborhood – it is
gentrification pure and simple.

What is offensive in all this is that anyone who bought a home in
that area knew what they were getting into – large crowds every night
and all night long. It is to lessen this that the district is being
“shrunk”. Less windows for the prostitutes – a more compact area for
the tourists – less annoyance for the wealthy.

It is not about anything more than that.

Jim is also right on the mark.  Nick talks about Australia.  HP cites Nevada.

Question and answer

What happened to Bear Stearns?

It ran out of money.

Here is much more, via Felix Salmon, and at least you can say that the Sitzkrieg is over and the plot is starting to unfold.  And here’s a picture.

Addendum: "…Bear Stearns, which has a leverage ratio of over 30 to 1, meaning it
borrows more than 30 times the value of its $11 billion equity base."  Here is the link.