Month: October 2008

Nobel predictions

I used to always predict Fama but I can’t this year.  Thomas Sargent is worthy and he has done much more than "rational expectations" but that moniker will hurt his chances for now.  Shiller is a possibility but maybe that looks like pandering to current events.  And I don’t think they will pick anyone who was on the board of A.I.G., at least not this year.

Here are my old picks.  This still wouldn’t be a bad year for Tirole, Williamson, or anyone else who worked on agency problems.  It seems those problems matter.  And there is still environmental economics.  Or the "surprising European who is undervalued by Americans" pick, a’la Maurice Allais or Trygve Haavelmo.

What do you predict?  Please tell us in the comments.

Houses for Sale! Houses for Sale!

Tyler and I have both suggested that increased immigration would help to increase the demand for housing and relieve some of the financial crisis.  Writing in the WSJ Lee Ohanian concurs:

We should encourage the immigration of prime-age individuals. Beginning in 2007, net immigration fell to half of its level over the previous five years. 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.

More generally, Ohanian warns that what made the Great Depression great was the misguided policies that Hoover and Roosevelt adopted to fight the depression.  Ohanian has an ill-considered swipe at Obama on this score but the general point is valid and worth remembering as we rush onwards. 

I’ve never traveled with Alex before

Until now, that is.  We’re even in a country with a partially nationalized banking system.

The headline from yesterday’s Daily Mail is scary: "It’s outrageous that banks demand taxpayers’ money yet impose 15 pc interest rates on small businesses."  The article then outlines the high interest rates that borrowers have to pay.

I guess more easy credit is what we need and nationalization is the way to get there.  If I can believe this morning’s headline, the United States may be headed to the same place.  Remember all that junk — like the subsidy for small arrows — that they ended up sticking into the Paulson plan?

What I’ve been reading

1. The Sacred Book of the Werewolf, by Victor Pelevin.  A fun Russian weird novel; here is a good review of it.  It’s one of the few works of fiction I’ve finished lately.

2. The Patron’s Payoff: Conspicuous Commissions in Italian Renaissance Art, by Jonathan K. Nelson and Richard J. Zeckhauser.  Put together a collaborating art historian, a first-rate microeconomist, an interest in signaling and a preface by A. Michael Spence and this is what you get.

3. White Heat: The Friendship Between Emily Dicksinson and Thomas Wentworth Higginson, by Brenda Wineapple.  Yes, this is a very good book.  But it has the same problem that most other Emily Dickinson books have.  Her poems are so short you can fit them into a narrative and they are so strong they tend to overwhelm any non-fiction context they are put in.

4. Geoffrey Heal, When Principles Pay:Corporate Social Responsibility and the Bottom Line.  The main point is that socially responsible behavior is often profitable for business in the long run.  I know that doesn’t sound like such a compelling message right now, but this is a highly intelligent and now a sadly neglected book.

5. Samuel Johnson: A Biography, by Peter Martin.  This is only the third best biography of Johnson (Walter Jackson Bate is #2) and it is still one of the best books of the year.  What does that say?

Tyler Cowen on ethnic dining

Currently, what are you favorite places to eat in the D.C. metro area?

I love Thai X-ing (DC), Meaza (Baileys Crossroad), Nava Thai (Wheaton), Hong Kong Palace (Falls Church), China Star (Fairfax), Bombay Indian (Silver Spring) and Angeethi (Herndon), plus just about everything Vietnamese in Eden Center (Falls Church). The 9th Street Ethiopian row is very good as well, and also Zenenbech, up on Florida/U/5th or so. Those places are very good and I can eat at them more or less without limit. There aren’t many places around as good as those.

Here is much more.

The Partnership

For the proud Sachs family, the failure of Goldman Sachs Trading Corporation became a very public humiliation.  In 1932, Eddie Cantor, the popular comedian and one of forty-two thousand investors in Goldman Sachs trading Corporation, sued Goldman Sachs for one hundred million dollars while regularly including in his vaudeville routine bitter jokes about the firm.  One: "They told me to buy the stock for my old age…and it worked perfectly…Within six months, I felt like a very old man!"

That is from the new Charles D. Ellis book The Partnership: The Making of Goldman Sachs.  So far this book is a very good history and it has more economic and historic substance than The Snowball.

What happened to the carry trade?

Remember when investors would borrow in Japanese yen, at low interest rates, to invest in higher-yielding currencies such as the Australian and Kiwi dollars?  For a long time it seemed like free money was just sitting there on the table.

Well, two days ago the Australian dollar dropped 12 percent against the yen and the Kiwi dollar dropped ten percent, both in a single day.  Calculate that return on a yearly basis and you can see the problem; toss in leverage if you wish.

Here is one article on the destruction of the carry trade.  I suspect they are not planning on awarding the Nobel Prize this year to Eugene Fama (is Bob Shiller a better bet?), but in fact the selection of Fama, despite his association with the "efficient markets" idea, would be quite timely.

Paragraphs to ponder

The pursuit of “risk
sensitivity” led to a re-organisation of bank assets away from lending on the
basis of the banker’s private views about the borrower – regulators considered
this hard to quantify and a little suspect – towards lending on the basis of an
external credit rating. The higher the rating, the lower the capital banks had
to set aside against the loan. Regulators saw this as not only risk-sensitive
but transparent and quantifiable. Banking by numbers was oh so modern.

Here is much more, interesting throughout.

David Murphy makes me weep

He is a loyal MR reader, but that doesn’t mean he always carries good news:

My question:

When the Fed backstops the Commercial Paper market by entering it and offering a "risk free" counterparty to companies, is it crowding out private lending?  I also feel like the same could be true of the Treasury.  If the Treasury offers to buy the toxic MBS on the books of private companies, they lose all incentive to deal with private counterparties that are not risk free…

I know that the government is trying to encourage credit to flow. In some way it seems like they are impairing the flow by making markets on risk free capital.

Boo hoo!  The ideal, of course, is that the people who need riskless assets can hold riskless assets and pass their funds along to those who can profitably lend funds out to riskier borrowers.  That’s not where we are right now.  To put this more concretely, if the Fed is not buying or backstopping your commercial paper (and they’re not touching mine), maybe now it’s harder to make your way in the marketplace.

David, by the way, poses the thought experiment of ceasing to issue T-Bills but suggests that might bring Armageddon. 

Russian foreign aid, circa 2008

A E4bn loan from Russia might make financial sense – although Russians might think otherwise given Moscow’s shaky finances. But it would create strategic ructions. Iceland is a NATO member, but Russia would want something in return for a loan equal to almost a third of the tiny state’s GDP. The US would fret this could eventually mean a Russian military presence in the North Atlantic.

Here is the story.  It seems that Iceland may prefer Russia to the IMF, but Russia does not yet seem on board.  I can only wonder what Bobby Fischer would have said…

Reverse auctions: a defense

The US is embarking on the greatest public intervention into financial markets since the Great Depression. The ultimate success or failure of the intervention will depend, in part, on the fine details of the auction design.

The basic auction approach suggested here is neither new nor untested. It has been used successfully in many countries in recent years to auction tens of billions of dollars in electricity and natural gas contracts, as detailed in Section 8. Moreover, it is quite similar to the approach that has been used to auction more than $100 billion in mobile telephone spectrum worldwide. It is a dynamic version of the approach that financial markets use for share repurchases. If implemented correctly, each auction can be completed in less than one day. And the same software used for implementing electricity and gas auctions could be used to initiate these auctions in October.

Here is the whole paper, thanks go to Samson in the comments section.  So far this is the best paper I’ve seen on the topic.  Tim Harford offers other useful links.  Still, I am inclined to agree with Arnold Kling:

The theory that you can fix credit markets by "removing the clog" of mortgage securities is just that–a theory. My guess is that it will not work. I am sure that other things will have to be tried sooner or later–probably sooner. I hope the other moves work. I do not think it is at all realistic to rely on the Paulson plan.

Is there a positive spin to this?

Fed announces commercial paper funding facility.  Here is my post from yesterday.  My best shot at a positive spin, just offered to Alex in my office, is this:

They wouldn’t do it unless they had to.  And if they had to do it, that they are doing it is very good news indeed.

I am not sure that Alex was persuaded.  There are some good comments at the first link.