Month: December 2008

Lords of Finance

The author is Liaquat Ahamed and the subtitle is The Bankers who Broke the World but no it’s not about today it’s about the 1920s:

This book traces the efforts of these central bankers to reconstruct the system of international finance after the First World War.  It describes how, for a brief period in the mid-1920s, they appeared to succeed; the world’s currencies were stabilized, capital began flowing freely across the globe, and economic growth resumed again.  But beneath the veneer of boomtown prosperity, cracks began to appear…The final chapters of the book describe the frantic and eventually futile attempts of central bankers as they struggled to prevent the whole world economy from plunging into the downward spiral of the Great Depression.

The 1920s were an era, like today’s, when central bankers were invested with unusual power and extraordinary prestige.  Four men in particular dominate this story: at the Bank of England was the neurotic and enigmatic Montagu Norman; at the Banque of France, Emile Moreau, xenophobic and suspicious; at the Reichsbank, the rigid and arrogant but also brilliant and cunning Hjalmar Schacht; and finally, at the Federal Reserve Bank of New York, Benjamin Strong…

I am enjoying this book very much, though it terrifies me as well.  I hadn’t known that Norman, later in his life, thought he could walk through walls.  Nor did I know that in the 1920s one-third of the population of the state of Colorado lived there as a (supposed) respite from tuberculosis.  You can buy it here.

Priorities for the New FDA Commissioner

 The Manhattan Institute asked a number of experts in health care policy to provide brief words of advice to the new FDA commissioner.  Here is one bit from yours truly:

The most difficult but valuable pharmaceutical policy for the new administration will be to resist the temptation to impose price controls.  Price controls promise lower prices but the cost is fewer new drugs and diminished medical progress. Moreover, the promise is illusory. Since new drugs typically lower total health care costs (by reducing time in hospital) price controls will raise total health care costs. Prizes and patent buyouts, two innovative ways of reducing pharmaceutical prices while maintaining incentives to develop new drugs, should be investigated and tested.

Henry Miller, Paul Rubin and Mary Woolley also comment.

My favorite world music recordings of 2008

My services as an aggregator are probably of most value in this area, if only because there are so few other reliable aggregators.  I very much liked the following:

The Roots of Chicha: Psychedelic Cumbias from Peru; I bought it in 2008 at least.

Un Dia, Juana Molina.  Quirky, oddly textured songs from Argentina.  She’s not just a one-trick pony but she now has a string of excellent albums.

Geoffrey Gurrumul Yunupingu, Gurrumal.  Aboriginal music from Australia, on acoustic guitar, truly moving.  I don’t regret having paid $40 for it.

Calcutta Chronicles: Indian Slide Guitar, by Debashis Bhattacharya.

Anything from Network Medien.  Anything.  They’re the single best and most useful music label today.  The picks on any of their collections are impeccable and always worth the price.  This year I’ve been enjoying their Music of the Americas, Desert Blues (multiple parts), Golden Afriques Part II, and Sufi Music, among others.

Here are other world music picks.

On the popular music front, I’m now listening to Fleet Foxes at least once a day.  I’m also starting to like the new Bon Iver and the new Kanye West.

Assorted links

1. China photo of the day; I love the caption as well.

2. Improvised car pools, organized through iPhones.

3. A photograph of Gresham’s Law.

4. How has the financial crisis changed economics?  My words: "People used to think that these behavioral effects were small
anomalies that turned up in experiments but washed out in the real
world," says Tyler Cowen, an economist at George Mason University not
himself affiliated with behavioral economics. "But there’s a sense in
which they get multiplied in the real world."

5. NYT Words of the year: Robin Hanson’s "futarchy" makes the list.  Go directly to the excerpt here.

Japanese fiscal policy in the 1990s

Paul Krugman recommends this chapter by Adam Posen, which gives a good overview of the history.  The piece argues at length that the Japanese didn’t try much expansionary fiscal policy during their downturn of the 1990s.  On p.49 comes the evidence that fiscal policy works, at least as it was tried in 1995:

In the end, the September 1995 stimulus package did add significantly to economic growth in 1996.  Not only was the actual real GDP growth of 3.6 significantly higher than the 0.9 percent recorded in 1995, it was at least 0.9 percent higher than the growth forecasted for 1996 by all of the major international institutions and the financial consensus…This stimulative effect can largely be attributed to the fiscal package, although the decline in the yen also stemmed the decline in net exports (by -1 percent of GDP in 1995 and by -0.4 percent in 1996)…There was actually no other source of positive impetus to the Japanese economy in late 1995 and early 1996 that can be identified except discretionary fiscal policy.

A few observations:

1. This is a piece of evidence in favor of fiscal stimulus and so we should take it seriously.

2. It is, quite literally, only a single data point.

3. In November 1994 there was a big cut in personal income taxes and that may be responsible for some of the increase in economic growth in 1995-6.  (There was also reconstruction from the 1995 Kobe earthquake, as one reader notes in the comments.)

4. Japan was much weaker automatic stabilizers than does the United States.  Some of the fiscal policy boost was to strengthen those economic stabilizers.  The case for doing that is indeed much stronger than the case for initiating new government expenditures in the form of specific projects.

5. The history is fully consistent with an alternative interpretation, as I have discussed in my post on the fetishization of measured gdp.  Namely, the Japanese spent more money putting unemployed resources to work on construction projects.  Measured gdp went up, but the Japanese didn’t get much of value for their money.  (Japanese construction projects from this era are notoriously ugly, wasteful, and unpopular.)  The spending also didn’t set off any kind of lasting recovery.  It was the proverbial ditch digging without much in the way of later-order benefits or multipliers.  In these circumstances a boost in measured, temporary GDP is very different from an economic recovery. 

6. There is a deeper question of why governments so often back away from aggressive fiscal stimulus, if that policy indeed will bring so much recovery and thus bring in so many votes and so much revenue.  Posen in his chaper suggests that ideology is at fault but I am not convinced.  After all Japan is not ruled by Grover Norquist.  The alternative null hypothesis is simply that governments see the fiscal stimulus is not working.

Anyway, that is the evidence we are being asked to spend $600-700 billion on — or $2 trillion for some –so I thought you should see it.

Addendum: Here are very good comments from Greg Mankiw’s blog.

Markets in Everything: Hurling Shoes

At least one stimulus plan appears to be working.

The shoe hurled at President George
W. Bush has sent sales soaring at the Turkish maker as orders
pour in from Iraq, the U.S. (!, AT) and Iran.    

The brown, thick-soled “Model 271” may soon be renamed
“The Bush Shoe” or “Bye-Bye Bush,” Ramazan Baydan, who owns
the Istanbul-based producer Baydan Ayakkabicilik San. & Tic.,
said in a telephone interview today.    

“We’ve been selling these shoes for years but, thanks to
Bush, orders are flying in like crazy,” he said. “We’ve even
hired an agency to look at television advertising.”

Hat tip: Mahalanobis.   

Does Santa have MFN status?

Dingel reports:

The US nominal average ad valorem tariff rate for (12 Days of) Christmas this year, which I calculated using the handy Harmonized (Tariff) Christmas schedule, is only 1.9%. I assume that Santa has MFN status.

Drums 4.8%
Pipes 0%
Milking machines 0%
Swans 1.8%
Geese $.02/kg
Golden rings 5.5%
Calling birds 1.8%
French hens $.02/kg
Turtle doves 1.8%
Partridge 1.8%
Pear tree 0%

I thank Alex Thiele, a loyal MR reader.  But I believe the optimal tariff on drums is zero.

The Basel capital agreements

In the context of New Zealand, I wrote this back in 1991:

Prudential management is perhaps the area where the current
regime involves the greatest danger. The Basle-based regulations offer too much regulation
in some areas and too little in others, impose inefficient restrictions on banks, and
require ongoing government intervention in the banking industry.

Market participants also express a very strong concern that
Reserve Bank staff do not have sufficient expertise to discern the riskiness of banks. No
criticism of Reserve Bank staff is intended here. The staff are competent when asked to
perform their proper duties, but they do not have the training and expertise necessary to
provide up-to-date evaluations of bank safety. Only experienced bank managers with
detailed on-the-spot knowledge of a bank’s asset portfolio are competent to make these
judgments. The Reserve Bank does collect great masses of information on bank assets, but
the proper digestion and interpretation of this information by an outsider is a nearly
impossible task.

Banks exist as specialized lending institutions precisely because
outsiders do not have the information necessary to evaluate and monitor loans. For the
same reasons that a nationalized banking system would be disastrous, governments are not
able to evaluate bank portfolios effectively.

The Basle capital standards are not sufficiently high to prevent
crises altogether, nor is monitoring frequent and interventionist enough to spot incipient
difficulties on short notice. Current regulations create an illusion of safety and
government sanction of bank solvency at times when real danger may exist.

…Because of differential capital requirements for different types
of loans, regulations effectively alter the net price of making each kind of loan. Some
kinds of loans are subsidised and others are penalised. Not surprisingly, governments have
decided to subsidise loans to public agencies.

In addition, housing loans have also been given favourable
treatment. Banks are now especially eager to make housing loans, because such loans lower
their real, post-regulation cost of capital. In effect, the regulatory environment is
influencing how the banking industry allocates loan capital.

Regulatory attempts to forecast which types of loans are
"safe" are likely to backfire; regulators have no means of ascertaining the true
riskiness of different asset classes. In fact, regulations which artificially encourage
certain classes of loans decrease the safety of these loan classes. Subsidisation of
housing loans, for instance, can lead to overcapacity in the housing sector and falling
home prices. In a non-inflationary environment, housing can be a relatively risky

Government attempts to influence the composition of bank assets
have had a disastrous history in New Zealand. The older "asset ratio" system was
one of the first and most important targets of deregulation in the 1980s. Under a
different and more subtle guise, the Basle standards are reintroducing this system into
New Zealand.

That also sounds like Arnold Kling.  Here is the whole report, which I have not reread recently, and it is mostly on monetary policy.  It called for capital insurance in lieu of the traditional lender of last resort function; New Zealand banks were mostly foreign-owned and the New Zealand banking system was small relative to global capital markets.  So if capital insurance can work anywhere that should be in New Zealand.

I don’t, by the way, understand what Kiwis spell it "Basle" rather than "Basel," except that they are copying the French.

I don’t know what to think of this

Via Jezebel,
I learn that a Japanese porn company is making "charity porn." They’ve
sent some porn actresses to Kenya, and filmed them having sex with
impoverished local Africans for their Naked Continent series.
The production company, Natural High, has proudly proclaimed that the
director made an $11,000 donation to a local charity, and will donate
another $10 for the purchase of every DVD of that particular film.

At some level it doesn’t sound right but I guess I can’t find it in myself to oppose this venture.  Here is more.  I thank Amanda for the pointer.

Elsewhere in the blogosphere, Brad DeLong has a very good post on banking reform (a more logical idea than a huge fiscal stimulus, though I’m not sure it would work) and Megan McArdle has a very good post on the automakers.

The weirdest sentence that John de Palma read today

"Mice may be responsible for a blaze that killed nearly 100 cats at an animal shelter near the Canadian city of Toronto, officials say(…)"   

Perhaps I should have titled this post "Policing Nature, part III."  Here is the link; it’s Friday afternoon and the mood is giddy.  By the way, if you’re suspecting conspiracy, one official noted:

"Unfortunately, the mice probably perished in the fire as well," he added.

Markets in everything, at first I thought this was a joke edition

Burger King Corp. may have just the thing. The home of the Whopper has launched a new men’s body spray called "Flame." The company describes the spray as "the scent of seduction with a hint of flame-broiled meat."

The fragrance is on sale at New York City retailer Ricky’s NYC in stores and online for a limited time for $3.99.

Burger King is marketing the product through a Web site featuring a photo of its King character reclining fireside and naked but for an animal fur strategically placed to not offend.

Here is the article and I thank John de Palma for the pointer.

The future of investment banking

Morgan Stanley announced today that Chicago Parking Meters, LLC, a consortium led by its infrastructure investment group that is part of the Firm’s Investment Management Division, has been selected by the City of Chicago as the winning bidder for the 75-year concession of the Chicago Metered Parking System ("the System" or "metered parking system"). Chicago Parking Meters, LLC submitted a bid of $1.15 billion for the metered parking system. LAZ Parking ("LAZ") will be responsible for the operation of the System.

Here is the link.  Remember the great scene from Donnie Brasco?  For the pointer I am thankful to Air Genius Gary Leff.

Is Basel II to blame?

Robert Waldmann has advice for libertarians:

I’d look into the Lucas critique — when policy makers assume that an
empirical relationship is a natural law and attempt to exploit it, it
disappears. In particular the usefulness to private agents of the
ratings caused regulators to decide to use them too (and destroy them)
via Basel II.

Along related (but contradictory) lines, in The Economist Alan Greenspan calls for higher capital requirements.  The arguments of both Waldmann and Greenspan make perfect sense.  The problem of course is defining "capital" in such a way that is not counterproductive.  You know the old joke:?  "Capital requirements: can’t live with ’em, can’t live without ’em."